Foreign Direct Investment in Retail: Bane or Boon

With Government very well putting the cap on Privatization & Disinvestment, foreign direct investment in trade has developed into the fresh theatre of war flanked by the proreform and anti-reform lobbies. Foreign investors are tremendously enthusiastic on charisma in Indias retail sector. AT Kearneys 2005 Global Retail Development Index has termed India The most compelling opportunity for retailers.1 Theres sufficient reasons cited for this: the country is becoming richer, close to a quarter of the population is in the 20-34 age group in demand by marketers, and punter expenditure is anticipated to pick up in a major way. Both sides have been taking extreme positions. Those rooting for FDI assure overall opulence if it is permitted. Undeniably, FDI in retail is emerging as a sort of litmus trial to the governments pledge to liberalization, with Prime Minister also supporting advancement on this front. On the other hand, those divergent on the pitch claim it will mop away corner shops in every locality, chuck inhabitants out of jobs & bring unthinkable melancholy. This article develop an insight as to what are the trends in Indian Retail Industry, benefits and drawbacks of FDI in Retail, whether it will be beneficial for economy and finally the challenges in Indian Retailing.

Current Scenario of Indian Retailing Industry

The share of organized retailing in India, at around 2%, is abysmally low, compared to 80% in the USA, 40% in Thailand, or 20% in China, thus leaving the huge market potential largely untapped. Mounting earning levels, education and an international revelation have contributed to the progression of the Indian middle class purchasing and shopping practice are budding as an outcome. Retailing all the way through non-traditional channels such as Fuel Stations, Direct Selling and Home Shopping Television is on the rise. Contemporary organized retail is petite and fragmented with cast list not being able to harvest economies of scale. However, retailing through formats such as supermarkets, hypermarkets, department stores and other forte chains are escalating. Top business houses in the country are investing in the sector. This includes Foodworld, Shoppers Stop, Crossroads, Globas, Pyramid and other such outlets. FDI in retail trading is not encouraged in any form. However, a few overseas retail names appearing in the marketplace in the nature of franchisee. Foreign retail chains like Marks & Spencer have already established their operations in the emergent Indian market. Quite a lot of companies including Metro, Tesco, Carrefour and Ahold are exploring entrance options. Benetton, Lifestyle and Zegna are already in the Industry in India. Organized retail is a lucrative proposition for a thespian who can bring finest practices from around the globe, leverage economies of scale and garner these benefits through retail operations in India. India has a hefty middle class of 350 million and a sophisticated personnel to lever diverse significant functions like merchandising, sales promotion, inventory management, purchasing and marketing. India also possesses IT skills in the area of supply chain management, database management and inventory management.

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A number of drivers are aiding the development of the Industry such as improved levels of income and increasing purchasing power, entry of foreign retailers and reforms in real estate markets. Given these developments the organized retailing sector is poised for significant growth in the country.2

FDI in Retail: Opinion of Opposition

The Indian Economy is highly regulated and the most significant directive is the restriction of foreign ownership. The main fear is that the ingress of MNC Giants like Wa1mart ,Tesco and Carrefour will throw the hundreds of thousands of the neighborhood Kirana store owners out of Business, leading to million of job losses. Another concern is with regard to the pricing power of the global retail giants which the communists say will squeeze out the suppliers and hurt farmers. The left are also worried that the foreign retail majors will hurt domestic players with the practice of predatory pricing and become monopolies.3 Most of these stores will be focused on major cities and big towns, resulting in a skewed urban development.

The Other side of the coin: Real View

A strong FDI presence in retail sector is expected to not only boost the retail scenario, but also act as a driving force in attracting FDI in upstream activities as well. This will be more prominent in food processing and packaging industries because many large retail chains also promote their own brands by way of backward integration/contract manufacturing. The following is the AT Kearneys Global Retail Development Index 2006 which clearly shows India on top of emerging retail markets with highest potential with Rank 1 and GFDI score of 100. Country India Russia Vietnam Ukraine China Chile Latvia Slovenia Croatia Turkey Rank 1 2 3 4 5 6 7 8 9 10 GRDI Score 100 85 84 83 82 71 69 68 67 66

According to the AT Kearneys Global Retail Development Report, India is more attractive than ever to global retailers. India's economic growth, forecasted at 8 percent

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GDP in 2006, continues to support the retail industry. The estimated $350 billion retail market is expected to grow 13 percent and the top five retailers account for less than 2 percent of the modern retail market. And with one billion people, it is the second largest population in the world. In view of the demands made by Industry and the need to boost the retail trade, the government is actively considering removing the restrictions. The first step that government has taken is to open Retail sector for FDI allowing 51 per cent in single brand retail trade.4 The outcome of FDI in retail is noteworthy in terms of the benefits to the customer, the generation of employment and the ability of more people generation X marketing. While in retail the organized sector would counter huge wastes and the mall has come to be more than a shopping the scenario is one of better prices to the producers and lower prices for the consumers. According to the market research report, Indian Retail SectorAn Outlook (2005-2010) prepared by RNCOS it is found that if the government allowed 26% of FDI into retail, the sector1 would grow at an AAGR of 28%-32% much more than current Rs 27,000cr.5 If one looks at the experience of countries like China & the US, one gets a feeling that the apprehensions of the left parties as well as the local retailers are misplaced. In America, which is by far the most matured retail market in the world, 95% of retailers are store operations. Now they may not be as small as our grocery shops, but are still small when looked at from the US perspective. Some of the worlds largest retailers, like Wal-Mart, JC Penny, Target, etc. are American. Notwithstanding the dominance by these large players, the smaller mom n pop stores still co-exist with them, though one may not find them in the same vicinity as the big retailers. And, even though their market share is getting eroded slowly, they still account for just under 50% of the total American retail trade. Similarly in China, the top 10 retailers (both domestic & International), had only 9.6% share of the $628-bn retail market in 2004. This was up from 2.9% in 2000. The kirana store owners in India face a threat from the domestic players, who have aggressive expansion plans for the future. In addition, few of the countrys large corporate houses like Reliance, the Tatas and the Munjals, etc. too have mega plans for the retail sector. In fact Reliance has announced one. So, the grocery shopkeepers will feel the heat from these companies in any case, which is a point the communists ally of the Government fail to appreciate. According to John Menzer, Vice Chairman and CEO, Walmart, Small Businesses have their customers happy and small businesses can grow and prosper with Wal-Mart. Even in China, where FDI in retail was allowed long time back, small vendors of vegetables and fruits coexist with the hundreds of superstores, who are perceived to be the biggest threat to the Kirana shops. Even in India, where organized retailers have started mushrooming in big cities, the grocery shop owners have not been wiped out. Those who are against FDI in retail are also missing an even bigger point. The one concerning backward linkages with the agriculture sector, efficiency in supply chain that foreign retailers can bring and the huge opportunity in farm exports. India can attain huge savings by merely improving the supply chain. Some 20-40% of all fruits & vegetables grown in the country goes waste due to poor transportation, storage and handling infrastructure. Also, for every rupee that an Indian consumer spends, the farmer

gets only 20-22 paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly source through farmers, consumers will have to pay less and the retailers will get higher margins. Though one may argue that the supply chain efficiency can also be brought in by the local retailers too, the moot point is that the global giants like Wal-Mart can substantially improve the fortunes of Indias farm sector by directly linking it with global supply chain. Remember, Chinas agriculture exports to the US nearly trebled from $3.86bn in 1999 to $9.96bn last year. India, on the other hand has made only a marginal progress, with its farm exports to America rising from $3.19bn in 1999 to just $4.28bn.6 A draft ICRIER report released in November 2004 called for 49% FDI in retail and opening up of the sector in a phased manner over a period of five years. Fears about large-scale loss of jobs in the unorganized retail sector due to inflow of FDI was unfounded, said the study. Job creation in the organized sector would more than compensate for loss of jobs, and consolidation in the retail sector would also push up economic growth. The report said that allowing foreign investment in retail would lead to inflow of technical know-how, encourage large-scale production, increase employment and investments and strengthen Indias position as a sourcing hub. Domestic companies would be able to compete on a stronger footing in the international market on the strength of the experience gained from working and competing with multinationals. The retail sector can generate huge employment opportunities, and can lead to job-led economic growth. In most major economies, services form the largest sector for creating employment. US alone have over 12% of its employable workforce engaged in the retail sector. The retail sector in India employs nearly 21 million people, accounting for roughly 6.7% of the total employment. However, employment in organized retailing is still very low, because of the small share of organized retail business in the total Indian retail trade. A modern retail sector has the potential of creating over 2 million new jobs within the next 6 years in the country(assuming only 8-10% share of organized retailing), according to Arvind Singhal, CMD, KSA Technopak India Ltd. A strong retail front-end can also provide the necessary fillip to agriculture & food processing, handicrafts, and small and medium manufacturing enterprises, creating millions of new jobs indirectly. Through its strong linkages with sectors like tourism and hospitality, retail has the potential of creating jobs in these sectors also. Though the Planning Commission has identified retail as a prospective employment generator, in order to strengthen the multiplier effect of the growth in organized retailing upon the overall employment situation, a pro-active governmental support mechanism needs to evolve for nurturing the sector. Issues like FDI in retail, allocation of government-controlled land on more favourable terms, strong political and bureaucratic leadership, etc., need to be addressed adequately.7 Mr. Ravi Raheja, Chairman, FICCI Retailing Committee, while underlining the need for FDI in the sector pointed out that foreign investment would generate competition and not adversely affect the small retailers. Ultimately, the consumers would stand to benefit in terms of a wide range of products of world-class quality and lower prices.

Challenges of Retailing in India

Retailing as an industry in India has still a long way to go. To become a truly flourishing industry, retailing needs to cross the following hurdles. Automatic approval is not allowed for foreign investment in retail.

Regulations restricting real estate purchases, and cumbersome local laws. Taxation, which favors small retail businesses. Absence of developed supply chain and integrated IT management. Lack of trained work force. Low skill level for retailing management. Intrinsic complexity of retailing rapid price changes, constant threat of product obsolescence and low margins. The retailers in India have to learn both the art and science of retailing by closely following how retailers in other parts of the world are organizing, managing, and coping up with new challenges in an ever-changing marketplace. Indian retailers must use innovative retail formats to enhance shopping experience, and try to understand the regional variations in consumer attitudes to retailing. Retailing marketing efforts have to improve in the country- advertising, promotions, and campaigns to attract customers; building loyalty by identifying regular shoppers and offering benefits to them; efficiently managing high-value customers; and monitoring customer needs constantly, are some of the aspects which Indian retailers need to focus upon on a more pro-active basis. Despite the presence of the basic ingredients required for growth of the retail industry in India, it still faces substantial hurdles that will retard and inhibit its growth in the future. One of the key impediments was the lack of FDI status, which is now allowed. There is a limited capital investment in supply chain infrastructure, which is a key for development and growth of food retailing and also constrained access to world-class retail practices. Multiplicity and complexity of taxes, lack of proper infrastructure and relatively high cost of real estate are the other impediments to the growth of retailing. While the industry and the government are trying to remove many of these hurdles, some of the roadblocks will remain and will continue to affect the smooth growth of this industry. Fitch believes that while the market share of organized retail will grow and become significant in the next decade, this growth would, however, not be at the same rapid pace as in other emerging markets. Organized retailing in India is gaining wider acceptance. The development of the organized retail sector, during the last decade, has begun to change the face of retailing, especially, in the major metros of the country. Experiences in the developed and developing countries prove that performance of organized retail is strongly linked to the performance of the economy as a whole. This is mainly on account of the reach and penetration of this business and its scientific approach in dealing with customers and their needs. In spite of the positive prospects of this industry, Indian retailing faces some major hurdles, which stymied its growth. Early signs of organized retail were visible even in the 1970s when Nilgiris(food), Viveks(consumer durables) and Nallis(sarees) started their operations. However, as a result of the roadblocks, the industry remained in a rudimentary stage. While these retailers gave the necessary ambience to customers, little effort was made to introduce world-class customer care practices and improve operating efficiencies.2

As in the case of any other sector, the colour of the money is not important. What is important is bringing in efficiencies into the system, which will come in when a sector upgrades itself from an organized cluster of hole-in-the-wall enterprises to an organized structure, with established mechanisms. Scaling up operations not only requires huge investments (which Indian retailers can probably rustle up) but also involves getting the

supply chain in place and adopting modern management practices, among other things. Foreign Investment will pull all this in.1 References 1 Why FDI in the Retail Sector is a hot potato? by Seetha published in Daily News Analysis (DNA), October 16 2005. FDI in Retail Sector: India by Arpita Mukherjee & Nitisha Patel, published by Academic Foundation in association with ICRIER and Ministry of Consumer Affairs, Food and Public Distribution(Govt. of India), 2005 Edition.
3 2

FDI in retail: The debate continues, www.etretailbiz.com R-day reforms: Single brand retail opened to foreign funds, Indian Express, January 25 2006.
4 5

Report on Indian Retail Sector-An Outlook (2005-2010), published by RNCOS, October 2005.
6 7 8

Retail Scenario in India: Unlimited Opportunity, www.ciionline.org Retail growth: a boon to job market, Economic Times, March 12 2006.

Article on Competitive growth & FDI by Mr. V.S.Manjunath & Mr. C.N.B.Rajesh, Acharya Institute of Tecnology.
9

Organized retail in India to triple by 2010: CRISIL, www.domain-b.com