Why there is no need for great celebration or for deep despair over FDI in retail
Much has been said and written about what foreign direct investment (FDI) in retail can do. Depending on which side of the ideological divide is speaking, the assertions are either that it is a magic wand to fix many big problems or that it is a destroyer of honest livelihoods, with little benefits of its own. What is common to both sides is that they are mostly low on fact, high on opinion and generate enormous amounts of confusion. Which is why, we think it is necessary to sift through all of the noise and look truth in the eye. The facts, as we see it, tell us that it has become a symbolic issue, far beyond what reality demands it ought to be; and that there is no need for either great celebration or for deep despair over the idea that FDI in retail is
now a reality. Our analysis tells a fairly straightforward story.
The government has hugely exaggerated the quantum and immediacy of benefits it put on the table to sell the policy—that aam admi consumers will benefit enormously, employment generation will be huge, the country’s supply chain will be transformed and large numbers of small producers and farmers will gain. As things stand, even if modern retail were to take off on all cylinders, these arguments would still not hold water for the next 10 years.
For one, there is the fact that aside from very old markets like America and Europe, in most newly developed markets, modern trade accounts for only 20-25 percent of all retail. India is already at 8 percent—which is significant—but the impact hasn’t been as dramatic as one would have assumed.
Then there is the fact that the economics of the Indian market is such that it makes little sense for global retailers to focus on all consumers. We’re convinced they will focus their energies on the top 33 percent of urban Indian households (a mere 10 percent of all Indian households); investing in the others isn’t quite what they know how to do profitably yet.
As for small manufacturers, we don’t see that huge numbers of them will benefit. Retailers across the world like to work with a small group of select vendors because it makes for better profitability. So yes, a small number will benefit significantly. And yes, employment will be generated. But it won’t be anywhere close to the numbers now being touted.
Then there is the argument that encouraging modern retail to invest will provide the much-needed booster shot for the country’s dismal supply chain infrastructure. Here again, let’s face it. Retailers aren’t in the business of building national infrastructure. About the only infrastructure they’d be interested in is their last mile.
With the exception of those in the luxury retail business, like Louis Vuitton, Armani or Gucci, the others follow a fairly straightforward model. You buy cheap from suppliers because you buy large volumes. Because you buy cheap, you can sell cheaper to consumers than traditional retailers, who are handicapped because they are small volume players. Ten Food Bazaars, for instance, would buy 200-300 times as much food and grocery than any of the large kiranas.
Puma first entered the country in the mid-1990s through a franchise arrangement with Carona. This did not work out and they terminated the agreement and appointed a new franchisee Planet Sports. However, the brand did not have control over the stores or pricing, and this arrangement too failed.
#4: Will all these stores get built?
#6: And jobs?
(This story appears in the 26 October, 2012 issue of Forbes India. To visit our Archives, click here.)