Damp squib


April 22, 2013

Vandana, The Week
Mumbai, April 22, 2013

It has been six months since the Indian government allowed 51 per cent FDI (foreign direct investment) in multi-brand retail. However, in spite of numerous attempts at wooing foreign retailers, there has hardly been any investment. Global retailers who had lobbied for access to India’s multi-brand market have, so far, shied away from entering. “It is not enough to criticise the government,” said Finance Minister P. Chidambaram. “India Inc. should go back and loosen their purse strings.”

Commerce Minister Anand Sharma and his team at the department of industrial policy and promotion (DIPP) have been meeting foreign retailers, consultants and industry representatives. They networked with the who’s who of global trade at the World Economic Forum in Davos in January, but FDI in multi-brand retail in India remains elusive.

“India is not an easy market to do business,” said Devangshu Dutta, CEO of Third Eyesight, a specialist management consulting firm focusing on consumer products and retail. “Retailers will have to put infrastructure in place along with a host of government clearances. A calibrated opening would have been better. China took 11 to 12 years to open up its retail sector. They [the government] should have consulted people across the spectrum, rather than hasten the process. They have overstated economic benefits and understated adverse effects.”

None of the global retail giants—Sainsbury’s, Walmart, Carrefour and Tesco—has expressed a desire to enter the Indian multi-brand retail sector. “We have not received any proposal for relaxation of norms,” said Saurabh Chandra, secretary, DIPP.

Sainsbury’s and Tesco have opened sourcing offices in India but are still noncommittal on multi-brand entry. “We have no plans to open stores in India as we are continuing to focus on growing our business in the UK,” said Tom Parker, spokesperson for Sainsbury’s.

A reason for the reluctance of prospective investors is the continuing protests by local traders and politicians. “The presence of global retailers will lead to loss of jobs and local shops will not survive,” said Praveen Khandelwal, secretary general of Confederation of All India Traders. “They will bring predatory pricing and end competition. Even in the case of cash-and-carry, they have been flouting norms. We will continue our opposition.”

India’s first wholesale joint venture Bharti Walmart’s cash-and-carry store in Agra has 48,000 registered members. The store is abuzz with activity as local shopkeepers and traders pour in to stock up their shops. They make impressive margins. “I save Rs.8 to Rs.100 on various products,” said a shop owner. Seeing its popularity, Carrefour has opened a store in another part of Agra.

The cash-and-carry business serves as a learning ground for global retailers, who first want to get comfortable with wholesale operations, infrastructure and supply chains before venturing into multi-brand retail. However, there are other reasons, too.

The FDI policy states that each state can decide if it wants to allow foreign retailers into its territory. With Gujarat, Kerala, Odisha, Uttar Pradesh, West Bengal, Madhya Pradesh and Bihar expressing their reservations, retailers are left with few options.

“Allowing foreign investment in the retail sector is clearly in violation of Gandhian principles and ideology,” said Odisha Chief Minister Naveen Patnaik. “FDI in retail will also lead to loss of income for small traders across the country.”

Even in states that have welcomed FDI, the opposition’s stand on the subject is key as retailers are at risk of losing their investment if the government changes.

“While a lot of background work is being done by global retailers looking to enter the Indian market, the uncertain political environment makes them jittery,” says Darshana Shah, business head of marketing and visual merchandising, HyperCity Retail. “With elections round the corner, people are still waiting and watching. Many foreign retailers are visiting stores, doing surveys and due diligence, but it will take time.”

The policy states that foreign retailers can open their outlets only in cities with a population of more than 10 lakh. Going by the 2011 census, there are 45 cities that make the cut. Of these, only 19 can attract FDI as the remaining 26 are in states that oppose it.

The sourcing clause is also a contentious issue. Under the policy, multi-brand retailers should source 30 per cent of manufactured or processed products from Indian ‘small industries’ with investment in plant and machinery not exceeding $1 million. “Apart from worries over quality, the mandatory sourcing norm will restrict retailers in getting products with technical specialisations,” says Pinakiranjan Mishra, partner and head of retail and consumer products at Ernst & Young, India. “Retail players will have to incur high costs towards training a large number of small suppliers, with the brand reputation at stake. Foreign retailers can’t keep monitoring whether the small industry has exceeded $1 million.”

The policy also requires foreign retailers to invest 50 per cent in ‘back-end infrastructure’ within three years. The government’s argument for the clause is that it wants to strengthen supply chain infrastructure. Globally, however, the supply chain is either outsourced or shared between various players.

“Everyone investing in their own supply chain is a highly inefficient model,” said Arvind Singhal, managing director of retail consultancy Technopak. “There are concepts of third-party and fourth-party logistics wherein the third party builds the cold chains and warehouses that are used by several players.” The major chunk of back-end cost will comprise land cost and rent of warehouses, but many foreign retailers already have back-end facilities for their existing wholesale ventures.

The slowdown of the world economy has made foreign retailers all the more cautious. Most are from countries currently under severe financial strain. So, they would rather put their house in order before venturing out.

Deterrents to foreign multi-brand retailers
* Mandatory 30 per cent sourcing from Indian small industries
* Political uncertainty
* Mandatory large investment in back-end infrastructure
* Violent protests from trade unions and shop owners
* Global slowdown and reputation issues. Walmart’s Indian unit under the government scanner