IIPM Admission

Tuesday, March 26, 2013

Foreign investment in the retail sector will be actually beneficial for it in many ways

Perceptions about the government’s decision to permit 51 per cent FDI in the retail sector have triggered a major controversy. Not only have the opposition parties gone all out to thwart the move, but allies to have backed out of the government over the issue, leading to an impending risk of the government collapsing. Why does FDI in retail prove to be so controversial? Today, the small shopkeeper prices staple food items and household products so arbitrarily that two different consumers may pay different prices for the same product on the same day. However the entry of big retailers into the market will ensure such malpractices cease through standardisation of prices.

While the unorganised sector of traditional retailers, which comprises 92 per cent of the retail market, has apprehensions over FDI, the organised sector of modern retailers which represents the other 8 per cent of the market is open to the idea but with some reservations. Traditional retailers are against FDI in multi-brand retail because they think it could drastically displace them from the market space with customers getting attracted to the retail giants through offers of lower prices.

On the other hand, modern retailers largely favour FDI as they believe it could create healthy competition, offer wider consumer choices and compel infrastructure development. Moreover, modern retailers do not feel threatened – given the enormous size of the Indian market, estimated at US $ 450 billion – because they feel that there is sufficient space for them to co-exist along with the new entrants in the field.

Also, the retail giants are unlikely to pose a threat to the 15 million small, independent grocery and retail shops, scattered across the country that comprise the traditional retail sector who would be able to continue to attract their loyal clientele. Given the size and diversity of the demographic profile across the country in terms of age, education and income, this is a reality.

For instance, a construction worker from a rural area would not feel comfortable shopping at an air-conditioned mall while a young urban professional would prefer doing so. Moreover, the young professional would be an extremely brand conscious consumer which a small store would be unable to provide for. Another aspect pertains to personalised services in terms of credit and home delivery and proximity to home – which the small shop owner offers his customers.

Undoubtedly traditional retailers would have to innovate and improvise their store strategies to cope with the entry of large format retailers. Considering that customer segments for unorganised and organised retail sectors are different, it is unlikely that traditional retailers would face the threat of displacement from FDI.

Among the many misconceptions, it is little known that the retail giants will only be allowed to establish a presence in population centers over one million, which is synonymous with urban areas. To that extent, rural India is not the target demographic for the retail giants. This would give the foreign retail majors access to 53 towns/cities in the country according to the Commerce Ministry. Moreover, these retail majors would have to source 30 per cent of their requirements from either manufactures or process units in the small and medium enterprisesaccording to one of the conditions specified for them.

For global retailers who suffer from low growth in the West due to poor consumer demand, India offers a maturing market for them to boost their top line and profitability. Some global retailers who now operate in the country with the Cash and Carry (wholesale) format have not been able to make the desired dent into the retail sector. The lack of supply chain and logistics infrastructure, government regulations, absence of coordination with small and medium scale processing units related to commodities; prove to be a stumbling block. Otherwise, some big retailers have plans to start their Cash and Carry businesses to primarily establish a market presence and create brand awareness for themselves in the country.

Today the retail sector as a major pillar of the economy, accounting for 15 per cent of the Gross Domestic Product, or US $ 450 billion. The sheer size of the country’s population – 1.2 billion people – puts India among the top five retail markets globally. Also, the fact that retailers are unhappy with the existing supply chain infrastructure which only FDI in retail can facilitate through capital investments only strengthens the argument to implement such a revolutionary economic policy.  


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