Retailing and the FDI Debate

Retailing is the interface between the producer and the individual consumer buying for personal consumption.

The Indian Retail Industry, which contributes 14% to the national GDP, is largely an unorganized market. Only 4% of the industry is organized, and it employs just 5 lakh of the total 4 crore work force in this sector. One of the reasons behind the explosion of retail and its fragmented nature in India is the fact that retailing is, probably, the primary form of disguised unemployment/underemployment in the country. It is the lack of other economic opportunities that forces people into this form of self-employment, even though much of the profit is marginal.

If we look at retail formats, the first is Single brand retail which is confined to sportswear, luxury goods, apparel, jewelry and handbags. FDI in single brand retailing means allowing single global brands to sell products of their own brand to consumers directly.

The second is Cash and Carry formats which comprise wholesale depot operations, i.e. they buy goods in large quantities from the manufacturer and then sell them to their large customers at prices only slightly above what they paid for them. They accept low profit margins in return for high-volume sales, and are able to keep costs to a minimum.

The third is Multi brand retailing in which retailers sell household, personal care & other items of all international brands to consumers directly, like conventional kirana stores. It is this format which has got the eye balls rolling; allowing FDI in this segment will mean that global retailers like US based WalMart and French retail giant Carrefour can start operations in India.

After much debate, the Government has finally opened the retail sector for all formats, but has left the decision to implement it, to the individual states.

So why is the government strongly supportive of FDI in Retail?

Firstly, because they believe that farmers, who at present get just 1/3rd of the final price paid by consumers,will be paid better, just like their European counterparts, who get a fair share of 2/3rd of the price. Moreover, FDI in front-end retailing will propel growth in the rural sector, with large investments in development of post-harvest and cold-chain infrastructure nearer to the farmers’ field. Secondly, the government knows that international retailers will bring with them technology and management know-how, that will impact the entire retail sector through the adoption of best practices and investment in organized retail by domestic players.

The opposite view point has some valid apprehensions as well.

The biggest worry of FDI opponents is ‘predatory pricing’ by foreign players, wherein given their economies of scale and huge resources, large retailers will be able to provide their merchandise at significantly cheaper rates compared to smaller retailers. Another big concern is labor displacement by modern retailing, which will destroy the traditional retail sector. Critics feel that till the time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense to keep on hold, any policy that results in the elimination of jobs in the unorganized retail sector.

Another worry is the creation of a monopolistic situation by these foreign companies, since these marts would be more likely to source their raw materials from abroad and procure goods like vegetables and fruits directly from farmers at predetermined prices. This would mean that a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers.And lastly, they fear that producers and traders at the lowest level of operations will never find place in this modern sector, as they would only employ fluent English-speaking helpers.

At our end, some thought has gone into what can make it easier for the Government to implement the FDI policy with minimum backlash, and here are some of the solutions we can put forward.

Firstly, the biggest worry of predatory pricing can be put to rest by having a vigilant eye on the pricing done by these foreign marts. Government must adopt strict anti-predatory pricing laws, similar to the ones ruled by Germany’s highest court in 2003. This law stated that Wal-Mart’s below-cost pricing strategy undermined competition and violated the country’s antitrust laws, and so the federal Cartel Office ordered Wal-Mart and two other large supermarket chains to raise their prices. The items in question included about a dozen staple products like milk, butter, and vegetable oil.

Secondly, the entry of foreign players must be gradual and with adequate social safeguards, so that the effects of labor dislocation can be minimized. Improving the manufacturing sector in India could alleviate the situation of displacement of workforce from the retail industry. In order to avoid a monopolistic situation being created in the Indian market, the Government could impose and follow through conditions regarding the procurement of local farm produce, domestically manufactured merchandise and imported goods, to encourage purchase from the domestic market.

Lastly, the retail sector in India is severely constrained by limited availability of bank finance. The Government and RBI need to evolve suitable lending policies that will enable retailers in the organized and unorganized sectors to expand and improve efficiencies.

If the above steps are implemented effectively, some of the concerns around multi brand FDI in India would be addressed.

This blog post has been written by Anurag Shukla, Associate Consultant at Data Mining, Brandscapes Worldwide. Anurag is a ‘simple living high thinking’ kind of a guy 🙂

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About Brandscapes Worldwide

Brandscapes specializes in marketing analytics and insight consulting for consumer goods, services and the retail sectors. We leverage the power of advanced data mining tools and the practical marketing and communication planning expertise to distil actionable marketing insights.
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1 Response to Retailing and the FDI Debate

  1. Surabhi Jain says:

    Thank you Anurag for this article. It is a very precise yet comprehensive piece about the whole debate.

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