- Mission admission
July 13, 2013
The news of a member stumping up over a crore for entry to Mumbai’s Breach Candy club only proves that the allure of private clubs still holds…
- Finer tastes
July 13, 2013
It is the culinary tradition and its grand interiors that Bengal Club is justifiably proud of.
- High on gloss, low on airs
July 13, 2013
As older establishments close their doors, premium clubs offering state-of-the-art facilities and personalised service open for upwardly mobile…
- In This Section
- Entire Website
From the Times Of India
- MOST POPULAR
FDI in retail: Bigger Bazaar
Late last year, Prime Minister Manmohan Singh announced the decision to allow foreign direct investment (FDI) in multi-brand retailing. The cacophony that broke out was loud. The government buckled and put the plan on hold. Cut to last week: the same announcement and even louder protests. This time, the government says it is holding firm.
So are global retail giants, some of whom who are already present in the wholesale segment in joint ventures with Indian companies, all set to descend on desi shores? Not so fast. Consumer may have to wait for some time to shop in chains such as Aldi, Delhaize, Safeway, Kmart, SuperValue, Sainsbury, TESCO, Costcutter, Londis, Fairway, Waitrose, Carrefour and, of course, Wal-Mart.
A closer examination of the new policy throws up several issues such as states getting the option to decide whether they want to implement FDI or not and a mandatory investment of $100 million in the first three years by foreign retailers. At least 50 per cent of the total investment has to be in backend infrastructure. More importanly, other essential reforms in the agriculture sector are still not in place.
While the debt-laden domestic retail industry has hailed the development advocating its benefits to farmers and consumers, there is a set of naysayers who think the real change on the ground will only happen when reforms in the Agriculture Produce Marketing Committee (APMC) Act and implementation of a unified Goods and Services Tax (GST) take place.
Estimates from Boston Consulting Group (BCG) say that modern retail requires about $60 billion investment- across back-end and front-end - in the next 10 years to reach its true potential and only part of it will be funded through FDI and will depend on how many states allow foreign supermarkets to set up shop in their respective states. Currently, the overall retail market in India is estimated to be about $450 billion with modern retail comprising 7 per cent.
Many argue that organised retail can help counter food inflation and bring down prices. A BCG-CII report from last year says that given the ability to drive efficiencies and leverage scale, modern trade is able to increase affordability for consumers. "Our research has shown that modern retailers on an average monthly basket save anywhere between 4-6 per cent. In the short term, the opening of the sector should lead to consumer price reduction and some employment generation - but not be a game changer. The major impact - on the backend infrastructure, reduction of wastage - will take a few years to realise, " says Abheek Singhi, partner & director, consumer & retail practice at BCG India.
India's largest retailer Kishore Biyani says that big change will happen but over time. "We have already proven that the prices offered by modern retailers are 3-4 per cent cheaper than kiranas, what is it that a Wal-Mart will do which will be different?"
Bharti Wal-Mart, a joint venture between Sunil Mittal-led Bharti Enterprises and Walmart Stores, which is already running cash and carry stores in the country under the brand name Best Price, is likely to see a change in ownership. The Indian conglomerate is in discussions with Wal-Mart for bringing investment in Bharti Retail.
Rajan Mittal, managing director of Bharti Enterprises, says that farmers will gain in the form of better returns for their produce as retailers will look to develop direct procurement linkages with them. We already have some extremely relevant examples of this both in India and other emerging markets.
"Under Bharti Wal-Mart's direct farm programme, farmer incomes have gone up by 7-10 per cent over the last few years, " says Mittal. "Retailers even associate themselves with activities like soil testing for nutrient levels to capture deficiencies and mapping of agri-input requirements with the help of agronomists to ensure quality of produce. These initiatives not only improve productivity at the farms of the contracted farmers but also leave a 'demonstration effect' on other farmers in the region, " he adds.
But not everyone is buying these arguments. One of them is Arvind Singhal, chairman at the retail consultancy Technopak Advisors. "Modern retail, whether it is local or foreign, cannot make a huge and immediate impact on farmers, the real change will happen by bringing about reforms in the agriculture sector, " he says. Those in favour of FDI in retail talk about how there will be development of cold chains and the back end but the fact is these are done by a third party and not by the retailers. "It is wrong to say that retailers will be able to stock potatoes grown by farmers;they only own distribution centres, which are not warehouses. And if these efficiencies are not drawn up, then no retailer will be able to bring down prices, " points out Singhal.
The proposal to allow FDI was first passed last year in November but it never managed its way past key Congress allies like TMC's Mamata Banerjee. However, this time the government notified the policy decision despite countrywide protests and TMC's withdrawal of support from the government. As of now, Andhra, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli have endorsed FDI.
Pranab Barua, business director, apparel & retail business, the Aditya Birla Group, which operates the More-branded supermarkets and hypermarkets, says: "Clearly, this sector requires significant investments in infrastructure and FDI provides access to low cost capital which was earlier hard to come by. " However, Barua feels, while FDI in retail was long overdue, he's not expecting a huge swing of investments from day one. He says global players have been looking at India for some time, but they are waiting for clear policy directions.
Perhaps, allowing the Samajwadi Party to protest against it and yet support the government, was a clever move, some industry experts say.
"There are several states which have signified that they are open to investment and could provide initial proof of concept to other states, " Barua says.
Consider some of the other hindrances. The erstwhile APMC Act of 1960s vintage, which prohibits any transaction outside the four walls of a mandi, is not relevant any more. By the end of 2003, a new model Act was recommended by the Government of India. But, since agriculture is a state subject, each state has to pass the new Act for it to come into force. Only a few states have moved in this direction
S Sivakumar, chief executive, ITC's Agri Business Division, says there must be a mechanism to ensure compliance to conditions like investments in the back-end infrastructure.
Another reform is to do with the Essential Commodities Act, which restricts the quantity that one can purchase, store or move across the borders of a state. Then there is also the derivative trading, i. e. futures and options, which is regulated by the Forward Contracts Regulation Act. The government's concern was that futures cause inflation and trading in certain commodities was restricted. "With such restrictions, it is difficult for one to scale up. It obviously means that any new investment that a firm wants to make would be rendered unviable. Of course, in each of these areas, there has been some relaxation over the last one or two years. But, one is always concerned about when the restrictions might be re-imposed, because this level of price volatility is inevitable for agricultural crops based on their annual demand-supply variations, " says Sivakumar.
Raising adequate capital to expand in a heavily fragmented market has been the bane for domestic retail entrepreneurs like Biyani. "It is a positive move and opens up various options for entrepreneurs to generate the much-needed capital that is required in this sector, " he says.
Debashish Mukherjee, partner at AT Kearney, a global consultancy firm, says, "To begin with, the most visible change will be that foreign retailers will start setting up stores and have a front-end presence, organised retail will see consolidation and simultaneously people will see a lot development in supply chains. We need to look at the investments from a long-term perspective. Benefits will come about for farmers and consumers but a whole host of other reforms need to be in place too. However, this is the first step in that direction. "
Experts say that the share of organised retail in the overall retail pie is so minuscule at the moment - only about 6-7 per cent - and even more so when it comes to food that its overall impact on agriculture and in consumer price inflation control will be minimal in the next 10 years. It is only, perhaps, after 15-20 years that consumers and farmers will see real benefits, and by that time the reach and share of modern, corporatised retail could touch 30-35 per cent.
Apart from political and regulatory roadblocks, a major challenge for the foreign retail chains could be catering to the diverse needs of the Indian consumer, which differ from state to state and region to region. India is considered to be one of the toughest markets. In the past, the likes of Coca-Cola, PepsiCo and Kelloggs have all resorted to customisation to please the Indian consumer but customisation is an expensive affair.
While food and FMCG multinationals had to only invest in plant, machinery and marketing, for a Walmart or a Carrefour, investment in large tracts of land will be critical. That would involve large investments given the property prices in some of the suburbs of large metro cities. Food and FMCG MNCs had the luxury of waiting for a longer period of time - 10-15 years - to break even. But will a large global retailer which is planning to pump in huge investments in India have the patience to wait that long, given the prevailing global conditions? The jury is out on this one.
Register for Full Access to the Crest Edition
Don't have a Facebook Account? Sign up for Times Crest here.
Subscribe to The Times of India Crest Edition and stay connected with our unequalled network of correspondents, analysts, writers and editors to figure the changes bubbling below the surface of society.