Sunday, July 11, 2010

FDI in Retail – A never ending discussion!

5th and 6th July 2010 would remain etched in the history of Indian Retail for some time to come. While the country witnessed an unprecedented (sic) response to a nation-wide Bandh (shutdown) called by the opposition parties against the recent Fuel price hike (after the Government deregulated Fuel prices) and to show their solidarity against rising levels of inflation on Monday, leading to estimated losses over USD 3 Billion, Tuesday was a green letter day for Organized Retailers. The Government of India (GoI) announced a discussion paper to debate on allowing FDI in multi-brand retail leading to mixed reactions across the country and outside. Everyone who was anyone in the Retail realm in the country had comments to make. Rightly so, as this public debate was much needed; while the fundamentalists have always argued against the entry of foreign multinationals in Retail, those in the business have usually welcomed the idea, although with caution. One of the biggest criticisms against such a move by the country is that the small retailers (Read: Kirana Stores aka Mom-Pop stores) would lose business to the modern, organized retailers.


Currently, Indian Government allows upto 100% FDI in Cash and Carry (B2B), 51% FDI in multi-brand retail and 100% FDI in single-brand retail – that means, the brand can sell various categories of products with the same brand identity – apparel, accessories, watches, footwear, etc. Insofar multi brand retail, the restriction is to ensure that Joint Ventures are formed only with Indian partners, thereby benefitting Indian business houses. Although this was allowed by GoI way back in 1996, apart from the then dominant RPG Group which formed a JV with Hong-Kong based Dairy Farm International to form Foodworld Supermarkets Ltd., not many business houses took advantage of the model. Organized Retail was after all not so lucrative those days and my own kith and kin didn’t take me so seriously when we would discuss the upcoming opportunities. Today, the top business houses in the country including Tatas (Westside Department Stores, Star Bazaar hypermarkets), Birlas (Aditya Birla – Fashion Retail, More Hypermarkets), Ambanis (Reliance Hyper and other formats) and Mittals (Bharti-Wal-Mart) are focussing on this business. Some of the concerns on allowing FDI in multi-brand retail are captured here;

Loss of livelihood for Kirana stores
The biggest and single largest qualm against allowing FDI in Retail have been that Organized Retail would lead to losses of small kirana stores. There are over 12 million retail touch points in India of which more than 90% of them are Unorganized. The estimated size of the Indian Retail Market (as per various sources online) is more than INR 200,000 Crores. So, 90% of those engaged in Retail business, to begin with do not pay necessary taxes to the Government. These small retailers operate on a net margin of 4-7% after all their expenses and hence the Governments (Read Political parties) have remained soft on them. These small traditional Retailers have been serving Indian consumers and their families for over four decades and remain favourites – from buying milk to bread or vegetables. Many of them provide credit facilities and some even deliver at doorstep at odd times of the day (and night), without any additional cost. These Kirana stores have been all time favourites for FMCG Companies to introduce and promote new products, new variants and various consumer promotions. All this changed since 2000 AD when organized retailers started to spring up all across the country. Those days, Organized Retail was less than 5% and was considered pricier and novel, even by urban consumers. However, Organized Retail has come a long way since then. In large cities and metros today, Organized Retailers aren’t competing with Kirana stores anymore, but with those of their own ilk – other organized retailers. It is quite common to see large advertisements in leading newspapers all through the week and weekends advertising various offers and promos to entice consumers to visit their outlets. Having said that, not many small retailers and Kiranas have lost business; In fact, they have got better and more organized than before. Those who are out of business are not because of large retailers, but because of competition in the same league – similar ones are offering better pricing and service, two main attributes why consumers were shopping at Kiranas. When consumers in SEC B and above moved towards Organized Retail, those below moved up from shopping at Govt. Run PDS Stores to small Kiranas. Maslow’s theory of Evolution?
Hence, the logic that small Kiranas would run out of business is not just a myth, but also immature. Remember, we have a billion people to feed, dress and house – there is enough and more opportunity at the bottom of the pyramid.  


Employment opportunities and benefits
Most of the Kiranas are entrepreneurs of their own right – they would have started their business using a small capital, borrowed from friends and family and the shop would actually be a part of a house, either their own or somebody else’s. The husband-wife couple take turns to run the show and some of their relatives’ children or their own add hands for support when required, especially on weekends or for home-delivery. It is amazing to see sometimes, children in their teens explaining fabulously about product attributes and pushing sales (top-ups), even better than Management Trainees of FMCG Companies. One of the biggest qualms of allowing FDI is that it would lead to loss of employment – a strange fact, since it is actually the couple who run the business and usually do not employ outsiders. Those employed are their own kith and kin and hence, the staff cost is less than 2% of their turnover, if not lower. Organized Retailers need to comply with Govt. norms with regard to payment of wages and the staff salary includes health benefits (ESI) as well as long term benefits (gratuity / pension). Therefore, Organized Retail would not only provide higher wages to those working in the front-end but would also ensure continuity of service and job-security. The Future Group along with its subsidiaries and joint-ventures, which manages various formats such as Big Bazaar, Central Malls, Pantaloon Fashion and various other formats employs over 12,000 employees!


Capital infusion and erosion of profits
Capital infusion is considered among the biggest benefits of allowing FDI in Retail. Although large business houses like Tatas, Birlas and Ambanis have enough (monetary) capital to provide, what they need is Intellectual Capital. While it is always good to say that India is a country of entrepreneurs and we know to run the business best, what we also need to know from International partners is ways and methods to run the business more efficiently – simply because they have been running their own businesses successfully across countries and continents all over the world. Having said that, the next concern is that the multi-nationals would send their profits back home to their headquarters situated outside the country. This too, is a far-fetched dream. The net margin EBITDA that Organized Retailers manage is between 4-12%, depending on the nature of their business. Typically after paying taxes of all sorts, what they end up with a single digit or a decimal profit. Note, Retail is a business that gets profitable over a period of time and with scale. So, to increase their presence and run the business across the country, a lot of capital (including profits) gets circulated. So, if there is any one multi-national that would make money and send back home, it would be a long, long time!


Decision-Makers – Final word
While all the razzmatazz of the FDI paper was being discussed in India, Carrefour SA, the French Retailer announced that it is planning to sell of its business and exit South East Asian countries such as Singapore, Malaysia, Thailand, etc. Many would know that US Retailer Wal-Mart had to exit certain European countries after its failed attempt many years ago. Japanese and Chinese Retailers have never stepped out of their terrain since they believe they know their market best. As many would agree in the business, Retail is a very local business. The players need to understand the sentiments of the local and accordingly manage the business. I was at a popular Hypermarket at Bangalore yesterday and while I was talking to their Head of Operations, I learnt that the layout was designed by two foreigners who were experts from Europe. Needless to say, the layout was not only unfriendly but also needs localization, NOW. Consumers have shrugged off the “phoren” theory of Retailing and have embraced local players because of their offering. So, ultimately it is not just Government policies but the consuming public who decide the success or otherwise of any business, and particularly Retail. Time will tell who remains in the business.

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