India opens door to foreign retailers

Eric Johnson

American Shipper, November 28, 2011

The Indian government last week opened its doors to multinational retailers through a relaxing of foreign direct investment regulations.

The government has proposed allowing single-brand retailers (such as the furniture giant IKEA) to wholly own stores in India, while multi-brand retailers (like Wal-Mart and Carrefour) can own a 51 percent stake. Previously foreign single-brand retailers could only own a 51 percent stake in a joint venture with a domestic company, and multi-brand retailers could not hold any stake in front-end retail operations.

The moves, which have yet to be formalized, could greatly impact the supply chain landscape in this country of nearly 1.2 billion people. It could also rearrange the retail pecking order in India’s urban centers, with the country overwhelmingly relying on local “mom-and-pop” shops for its retails needs since gaining independence in 1948.

Bear in mind, the proposed new FDI rules would be subject to state approval, meaning individual states could limit, or even block, the entrance of foreign wholly- or majority-owned retail outlets. Indeed, one particularly hardline state politician has already threatened to burn down any foreign hypermarket that opens in the country.

The new FDI rules have the potential to bring more efficiency to the nation’s retail supply chains, through development of better transport infrastructure, and foreign best practices in logistics. But the looming threat of major global retailers entering India’s largely insular retail market has prompted cries of protectionism.

The argument goes that large-format outlets would quickly put small corner shops out of business by beating them on price, thanks to economies of scale and negotiating leverage that the private shops can’t match.

It’s been speculated that the big winners, if the rules are indeed adopted, would be the nascent group of domestic organized retailers. They would see the country’s supply chain landscape made more efficient, and they would be in a great position to partner, consult, or sell to foreign retailers looking for local knowledge.

Devangshu Dutta, chief executive of Third Eyesight, a retail consulting firm based in the New Delhi area, wrote Saturday in the Financial Express that he doesn’t see the local mom-and-pop shop culture disappearing anytime soon. He also said it’s naïve to think that Wal-Mart and the like will blast their way across the Indian landscape without any hurdles.

He said there will likely be intense blowback from local government, and noted that China’s acceptance of foreign retailers has been gradual and not without its own setbacks.

“If efficiency is simply a matter of scale, and if building up scale is simply a function of having deeper pockets from which to invest, it is obvious that the largest global retailers will squeeze their smaller Indian counterparts out of business, one way or the other,” he wrote. “However, retail is not a global business or even a ‘national’ business: it is an intensely local business. Sheer financial muscle can be used to bulldoze competitors, but the consumer chooses to shop at a particular retailer for several reasons, many of which are not influenced by the size of the retailer’s balance sheet. So, local retailers have more than a fighting chance. Walmart, Carrefour and Tesco are the only three foreign retailers in China’s top 10, although two of them have been there for more than 15 years.”

Dutta said the group most likely to hurt by the development of the foreign retail sector is India’s huge wholesale sector.

“The losers will include simple intermediaries and low-value wholesalers who have a diminishing role in a better-connected economy,” he wrote. “Large suppliers, including multinationals, will gradually find power slipping from their hands.”

He also said not to expect an immediate improvement in Indian supply chain, adding that the new FDI rules were no “panacea.”

“Where India as a whole can potentially derive the biggest benefit from foreign retailers is in developing agricultural practices and supply chains that comply with global requirements,” he wrote. “If channelled well, this can create tremendous export possibilities (‘agricultural produce outsourcing’), and help to propel rural incomes upwards, creating a wider economic impact. However, I think the critical things that have been debated most hotly will also be the slowest to be impacted: foreign retailers contributing to bringing prices down, and on the other hand, potentially damaging local competitors.”

Dutta also warned that the presence of foreign retailers won’t, in and of itself, drive supply chain efficiency.

“The growth of modern retail is an outcome of the development of the economy and a better supply chain, and a working population that is seeking food in more convenient and safe forms; it doesn’t necessarily drive supply chain improvements itself,” he wrote. “Indeed, in India, during the last decade, modern retailers have deployed money and management more on opening stores in a drive to capture market share, than actually in supply chain improvements and operational efficiencies. However, without investments in the supply chain, neither can the quality of products be significantly improved nor their cost significantly reduced.”

Finally, Dutta argued that the government can’t absolve itself of future economic development responsibility and merely let the private sector drive supply chain investment.

“We also cannot run 21st century supply chains on dirt roads, with unpowered storage and a poorly educated workforce,” he wrote. “The benefits of FDI in retail will remain largely unrealized for the nation overall if there is no simultaneous investment by the government in three key areas: transport infrastructure, electricity and education. The Indian government must be a ‘co-investor’ and active partner in developing and maintaining these aspects much more aggressively.

(Read: "Debate on FDI in Retail — More Heat than Light")