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Monday, 12 Dec 2011
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FDI hike in Retail
FDI Hike in Retail_ProjectsToday

Srinivas Rao_ProjectsToday
Shrinivas Rao,

CEO-Asia Pacific,
Vestian Global Workplace Solutions

India is the fourth most sought after destination for global retailers and research shows that overall consumer spending has increased as a result of organized retail. In light of the above facts, the government's decision to allow 51 per cent in FDI in Retail just seems like the next step to further the prospects of this already booming industry.
 

The Infant Industry Theory, a theory arguing that governments should play an active role in protecting fledgling domestic industries from competitors, is probably one of the reasons responsible for the deadlock in parliament over the opening up of the Retail sector to FDI. The theory argues that the government should help create a stable local economy with industries that can eventually compete on an even footing with international players. However, despite the protective sentiment behind the deadlock, the opening up of the FDI in retail will probably have the opposite impact on the Indian economy.

 

India has responded positively to organized retail in the last one and a half decade. With liberalization of trade policies and the Indian economy growing at a tremendous rate, the last few years has witnessed immense growth in this sector, the key drivers being change in consumer profile and demographics, increase in the number of international brands available in the Indian market, increase in urbanization and world class shopping environment. Even though organized retail is less than 10 per cent of the retail sector in India, the scope for growth is tremendous with the industry set to grow at a rate of 30 per cent - 40 per cent annually. India is the fourth most sought after destination for global retailers and research shows that overall consumer spending has increased as a result of organized retail. In light of the above facts, the government's decision to allow 51 per cent in FDI in Retail just seems like the next step to further the prospects of this already booming industry.

 

However, no matter what the government's decision, there will be a few challenges that the multi brand retail sector in India will have to overcome in order to become the successful industry the government is envisioning it to be. The first obstacle, opposition in states not ruled by the current federal government, has already proven to be a large stumbling block for the industry. With parliament in a logjam, the ruling party will have a tough time trying to convince its opposition on the virtues of this move. Apart from this, understanding the back-end operations and the supply chain will be one of the major challenges. Well known foreign retail chains like Wal-Mart and Carrefour have perfected their back-end operations and our Indian retailers will need to pull up their socks if they want to compete with these giants. There are already some companies that have set up their teams in India to study this aspect and have been waiting for the FDI to open up before rolling out their plans. This just goes to show the enthusiasm of foreign companies to invest in this behemoth country.

 

However, retailers will have to tackle some perennial issues that have been plaguing the already present retail organisations for a long time, namely inadequate transport infrastructure and cold chain facilities. And even though India has come to be known as the IT hub of the world, lack of IT infrastructure with limited online retailing, low automation in supply chain resulting in poor coordination between suppliers, transporters, warehouses and endusers, will be another hurdle in the multi retailer's path. Multi brand retailers would also have to deal with the shortage of trained work force in the industry and the high cost of real estate in metro cities. Complex and high interstate taxes that have baffled Indian retailers up until now, will now also become a problem for the international big boys of retail, interested in setting up shop here in India However, from a customer's point of view, multi brand stores will definitely have an edge over the kirana stores. The convenience that the multi brand retailers will offer in terms of variety or products under one roof coupled with great service, not to mention the assurance of quality and hygiene, would ensure that the customers visit the store more often, if not regularly. Multi Brand retailers also offer value based sales promotions, helping the consumers save; something which is ingrained in every Indian e.g. Big Bazaar's Wednesday promotion - "Hafte ka sabse sasta din", which is a hit with homemakers.

 


 


Shrinivas Rao,

The founding member of Vestian Global Workplace Services, is responsible for Vestian's growth and expansion in Asia Pacific. With over 20 years of experience in global real estate industry, he has assisted various Multinational Corporations with portfolio planning, strategic consulting, expansions/ relocation and project delivery in order to achieve their real estate goals in key Asian markets. His association with the industry dates back to the beginning of organized real estate consultancy in the country. He is also amongst the pioneers of professional real estate consulting services in India. In his previous engagements, He has successfully established UGL Equis' Asia Pacific operations and has held senior positions with Cushman & Wakefield and Colliers in India. He received his BE in Civil Engineering and MBA in Marketing and Finance.

 

 

Yet, the kirana stores are in no danger of being eliminated. Internationally, multi brand retailers are known to set up shop outside main cities due to low real estate costs and easy accessibility to the local farmer. Increasing traffic and lack of time will dissuade household members to venture out to the outskirts just to get their monthly groceries. Furthermore, a local shop will deliver goods home for free to the local household. No multi-brand retailer can compete with that level of personalised service. If anything, the entry of retail big boys is likely to hot up competition, giving consumers a better deal, both in terms of prices and choices. Mega retail chains need to keep price points low and attractive - that's the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retailer can also learn.

 

India will involve a well thought out strategy. The 51 per cent limit on FDI will leave Multi-brand stores with two options for entry. They may adopt either the acquisition model or the joint venture model. The joint venture model would be preferred as only 51 per cent FDI is allowed and this ensures employment for lakhs of people. Big retail chains are actually going to hire a lot of people. So, in the short run, there will be a spurt in jobs. Eventually, there's likely to be a redistribution of jobs with the drying up of middlemen and some new ones sprouting up. Apart from this, joint venture will give the multi brand stores the advantage of understanding the complex Indian Retail market. The fear that the emergence of multi brand retail would affect the growth of Cash and Carry formats has also be proven baseless. Cash and carry formats cater primarily to businesses and not to individual households. Multi-brand retail stores are present in India under Indian Groups like Future Group, Birla etc. and these have not had any impact on the cash and carry stores so far.

 

In light of the above, despite the challenges that an international multi brand retailer would face while setting up shop, it can be safely concluded that allowing healthy FDI in the retail sector would lead to a substantial surge in the country's GDP and overall economic development. Not just that, it will also help in integrating the Indian retail market with the global retail market in addition to providing not just employment but a better paying employment to lakhs of people.

 

 
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