CR Sukumar, ET Bureau, The Economic Times

Hyderabad, January 2, 2012

The Andhra Pradesh government is drawing up plans to open swanky supermarkets, venturing into the multi-brand retail territory that multinational retailers such as Walmart and Tesco are desperate to enter but forbidden from doing so.

It is also seeking partnerships with the wholesale units of Germany's Metro AG and Walmart, a minister said, to create a hybrid retail model that combines the best attributes of the public and private sectors.

The first store will open by the end of March in an upmarket area in Andhra Pradesh's capital Hyderabad. Eventually, the Congress government will spend some Rs 2,000 crore to set up a retail chain that covers all the main towns and cities in India's fourth-largest state.

"Our retail stores will look like any other supermarket, with hygiene assured. We will offer quality packaged food products at reasonable rates," state Food and Consumer Affairs Minister D Sridhar Babu told ET, adding the main aim of the stores is to provide succour from inflation to the middle and lower-middle classes.

The stores will begin by stocking everyday staples such as rice, pulses and commodities before adding a broad range of consumer goods. The outlets will be operated by the government at wafer-thin profit margins so that prices are kept low.

In November, the Congress-led United Progressive Alliance government at the Centre gave permission to foreign companies to invest up to 51% in India's $450-billion multi-brand retail sector but backtracked in the face of protests by traders and many political parties.

Other states such as Tamil Nadu, Kerala and Maharashtra have opened retail stores to sell food products, but with little expertise in the area, these businesses ran into severe losses. Maharashtra had to sell its ailing Sahakari Bhandar outlets in Mumbai to Reliance Retail.

Andhra Pradesh, the minister said, wants to learn from the mistakes of other states. That is why it wants to partner with the likes of Metro and Bharti-Walmart that have expertise the government lacks in areas such as procurement and logistics.

India allows 100% FDI in wholesale trade, where Metro and Bharti-Walmart operate. AP has started talks with the two for tie-ups, Babu said.

A 'Revolutionary' Idea Faces Challenges

Metro declined comment while Bharti Walmart said it is not in talks at present with the Andhra Pradesh government. "However, we will be happy to partner with the government on such an initiative, if invited," the cash and carry JV between Bharti Enterprises and Walmart said in a statement. The Andhra Pradesh government led by Kiran Kumar Reddy has been under pressure dealing with a separatist agitation in the Telangana region and a rebellion by the son of the late former chief minister YS Rajasekhara Reddy.

To win back public support the government recently said it will provide rice to the poor at Rs a kg, a populist move it said was necessary to ease the burden of rising food prices. Kumar Rajagopalan, the chief executive of the Retailers' Association of India, described Andhra Pradesh's supermarket store idea as 'revolutionary' but was sceptical about its chances of success.

While governments have expertise running the public distribution system, their abilities in areas such as procurement, logistics and retailing are limited, posing a big challenge to Andhra Pradesh's plan, he said. But Babu was confident the hybrid model, which will also incorporate lessons from the failures of other states, would work well. The government has some inherent advantages that it can make use of to keep costs low, he said.

Among them is the ready availability of prime real estate and support from the state's co-operative marketing federation Markfed for inputs such as fertilisers, pesticides, seeds and warehouses. Moreover, the Rythu Bazaars, vegetable markets run directly by farmers across the state, will be encouraged to sell their produce at reasonable prices at the government's new retail stores.

Instead of hiring employees on the government's rolls, staffing agencies will be asked to provide trained manpower for the stores. "In all, our proposed model should emerge as win-win for farmers, consumers and the educated unemployed youth," Babu said. EAS Sarma, a former economic affairs secretary, called the government's move "a step in the right direction" that will address the concerns of both consumers and farmers.

"However, to make it a success, the government should adopt a model similar to dairy co-operatives in Gujarat and sugar co-operatives in Maharashtra which include suppliers in decision-making and profit-sharing," he added.

Devangshu Dutta, chief executive of retail and consumer goods consultancy Third Eyesight, said the model will work if the private players' objectives are aligned with that of the government and their roles are clearly defined. "By managing the back-end of government-run stores, the private player will gain scale required for its own stores. The government in turn would have an efficiently-run business with upto-date systems and processes."