The story of Indian retail is a complicated one. To put things in perspective, about 40% of the country’s total GDP of $1 trillion comes from retail sales to Indian consumers. The local, one-off corner stores account for more than 94% of this total retail sales of around $400 billion.
So-called organised retail that can be defined as a chain of anything more than 3-4 stores backed by an Indian entrepreneur or promoter, accounts for only 6% of total retail sales. This category includes names such as Reliance Retail, Spencer’s, Pantaloon, Aditya Birla Retail, Bharti, etc.
It would help to put some facts in perspective. Store sales and store profitability are an outcome of a number of factors. First, how the supply chain is configured, how efficient it is, how does the fruit-and-vegetable (F&V ) supply-chain work, what is the dump, what is the negotiating power of the store, etc. Second, how well the store understands consumer preferences and needs, how good its merchandising skills are, how well its people are trained, and the ability to provide credit and convenience. And third, what is the store’s location, the cost of its real estate and its overall positioning.
An interesting fact about retail globally is that it is not a business that travels well. There are very few truly global retail chains. Wal-Mart has been successful in several countries, but equally it has done poorly in others. Carrefour and Tesco are the only other companies that have a strong market share in more than one country. In addition, the small-format store, or the convenience store, is almost always local in nature. So, even for Tesco, Wal-Mart and Carrefour, the format that they have used across borders has been the large-format, or hypermarket, store.
As regards the F&V supply chain, much is made of how organised retail can contribute. However, this part of the business is hardest to manage and run profitably, and no Indian retailer has been successful so far. Most chains keep F&V to generate footfalls, but it’s mostly a loss leader. The supply chain for the rest of the merchandise is easier to manage and is already reasonably efficient in the Indian context courtesy the distribution prowess of the large FMCG companies.
With this perspective, let’s examine the government’s intention and analyse what makes sense and what does not. Are the fears of the small retailers justified and what is the likely evolution of Indian organised retailing with Indian groups as well as foreign participants? The Dipp draft report states that FDI could be helpful in improving the backend, generate efficiencies in the supply chain that could help reduce inflation, provide employment and generally help reduce costs that will ultimately benefit the Indian consumer. These are all noble objectives and one can’t really object to any of them. But let’s take them one by one.
Will the backend improve?
My view is that the normal supply chain will definitely improve as the large retailers will be able to bring their advanced expertise to bear. More importantly, the likes of Wal-Mart, Tesco and Carrefour will be able to bring a global scale in their negotiations with the MNCs such as Unilever, Nestlé, Reckitt, P&G , Pepsi, Coke, etc.
They will be able to pass on these reduced prices to their customers and, India being a price-sensitive market, this will certainly help them pick up sales. On the other hand, I do not quite believe that these companies will be able to bring skills to bear on the F&V side — this is an area fraught with inefficient intermediaries such as the arthiyas and mandis, and while you can set up a direct distribution linkage with farmers, managing it successfully on an end-to-end basis is not an easy task — something that even the likes of Reliance and Pantaloon have also not been able to manage so far.
Will the customer experience improve?
Sure it will. Those customers who go to the large retail outlets will get better pricing and a better shopping experience, but whether it beats the convenience of kirana down the street for day-to-day shopping is highly debatable.
SO, wherever organised retail is available, there will be some shifting of shopping baskets such that the monthly shopping might move to the larger hypermarket, but the convenience and day-today vegetable shopping will continue from neighbourhood stores.
Will FDI in retail generate new employment?
Of course it will. As the Indian GDP grows, so will the need for new retail formats, experiences and outlets. New stores, whether kirana, organised retail or FDI, will automatically lead to new employment generation — it really depends on how much of the incremental spend each of these three categories captures.
It is a fallacious argument that employment generation will go up only because FDI retailers are entering the system — as penetration of any form of retail goes up in India, it will inevitably lead to new employment generation. Yes, one can argue that the speed of this penetration will increase through more competition and, therefore, employment generation will get hastened.
Will the kiranas be hit?
Those kirana stores next to a new store would, of course, be hit. But that would be the case whether the new store would have been an FDI store, an organised retailer’s store or even a new kirana. In general, however, I think that the value proposition of a kiranais so well-defined that it would be difficult to completely replace them: the convenience of location, credit, home delivery, years of established relationship, cheaper real estate, deep understanding of their communities and incredibly tightly merchandised stores will be impossible to replicate by a new player even in the long run.
Having said that, new competition would be good for consumers and bad for the existing players. And it can be nobody’s argument not to allow new competition.
The only question is whether we should allow new competition in the form of foreign players who can sustain years of losses. My view is: let them try. I don’t believe that Indian retail is an easy business and kiranas will also not simply roll over. They will band up, improve their sourcing ability, improve their already-robust product offering and compete fiercely.
All this will be healthy in the long run for the Indian economy and the Indian consumer, and I believe that all the new entrants in the market, whether foreign or local, will take from the growth in the pie, rather than from the existing market.
So, all in all, competition will get tougher, but I don’t think the kiranas need to fear the new players. They will weather the FDI storm just as they have successfully weathered the entry of the domestic organised retailers. And consumers will certainly benefit, even if the elusive F&V supply chain is not much improved, notwithstanding the government’s expectations in this regard.
Source: Economic Times