Walmart, Tesco, Carrefour do not represent the entire spectrum of multi-brand retail businesses
It is ironical that after years of heated discussion on the opening of India?s multi-brand retail to foreign investors there are no serious investment proposals yet from major international retailers and, instead, there is only an increasing list of queries and requests for clarifications. The government is likely to come out with some clarifications in the next few weeks but these may only lead to even more confusion, if some of the recent statements appearing in the media are to go by.
While the various political parties and assorted other antagonists to and protagonists of corporatised, modernised retail have been engaged in debate for more than a decade, the ground realities of the so-called organised retail have undergone a complete transformation. Some of these fundamental changes are:
Diversity of retail businesses: The entire public and Parliamentary discourse on multi-brand retail has been focused around one class of multi-brand retailers, namely the large hypermarket and supermarket operators such as Walmart, Tesco and Carrefour. While they are amongst the biggest and the most successful retail businesses in the world, they do not represent the entire spectrum of multi-brand retail businesses. There are specialty chains such as Best Buy (electronics and appliances), Walgreens and Boots (pharmaceuticals and select other merchandise), Debenhams and Macys (department stores), Foot Locker (footwear), Decathlon (sports and outdoor activity gear), WHSmith (books, food and select other merchandise), etc. Each of these business formats has very different operational structure, very different needs for financial investment, and very different supply chains.
Further, almost all major retail businesses are looking at multi-channel operations (physical stores, e-commerce and sometimes even direct selling to the consumers) since the consumers are looking at multi-channel convenience.
Reorientation of retail supply chains: During 1960s-1980s, the conventional thinking among major large global retailers was to have completely or nearly completely owned and controlled supply chains that sometimes even included taking equity stakes in select large producers of various products, owning/co-owning the logistics infrastructure including distribution centres and delivery trucks, owning retail and other real estate, developing proprietary IT and other operating systems, and maintaining in-house product development and quality assurance departments. During the 1990s, this thought process gave way to ?outsourcing? of all but the core front-end retail operations. At present, few retailers in the world have any intention to make any significant financial investment directly in any of the so-called back-end operations, e.g. distribution centres and delivery hardware, suppliers, product development and quality assurance and compliance, etc. Instead, there are large specialist firms who make such investment on behalf of the retailers, and in the process, becoming ancillaries or ?suppliers? themselves to the retail business operator. Retailers such as Walmart and Tesco have been in business for many decades and, therefore, do have legacy investments in the back-end. Going forward, wherever feasible, they are likely to disengage from such investments.
Consolidation of supplier base: Most major global retail players (indeed, even the large Indian ones) have long realised the difficulty and the inefficiency of having a very large base of suppliers. Most of them now prefer to deal with fewer, larger suppliers who have the technical capability to invest in state-of-the-art production know-how, and the managerial ability to interlink with the retailers? own operational processes such as dynamic forecasting of demand, traceability of merchandise to the very original source of production, and some degree of IT systems integration so that ordering, order processing and order tracking can be done digitally and seamlessly. In today?s context, forcing major global retailers to source from micro, small and medium (MSM) manufacturing entities is an exercise in futility. There is a place for MSM enterprises but not in tandem with billion and multi-billion dollar revenue businesses. To get a reality check, the government only has to see such developments in various other sectors such as automobiles where small and medium enterprises have now given way to large-scale manufacturers of various auto components.
Further, there are many product categories where MSM enterprises simply do not come into the picture in a significant way. For example, it would be next to impossible for retailers such as Best Buy or India?s Croma to sell appliances, consumer durables and consumer electronics that is being produced by MSMEs based out of India. Walgreens or Boots would have a similar impossibility in selling pharmaceutical and other related products that are produced by MSMEs. A departmental store such as Debenhams will have a similar challenge in sourcing goods from MSMEs since, by definition, such department stores generally sell merchandise of other companies? brands across various categories and have a relatively low share of their own private label.
Complexities of internationalisation: A retailer?s raison d??tre is to select a distinct range of goods for its chosen consumer segment and then offer them to those targeted consumers as per their demands and expectations related to specific merchandise (assortment, brands portfolio, pricing). With consumers across the world getting more demanding and more assertive about their specific needs and desires, it is increasingly more difficult for international retailers to customise their retail offer to specific new markets and various customer segments therein. The only reason why some (and not all) are still willing to undertake such a time and financial resource consuming exercise is in the belief that the new market (country) shall offer them an additional opportunity to grow. Since such an effort to develop country (and sometimes for large countries like India, state or region specific) retail business formats and then a localised supply chain to source specific merchandise for the very specific needs of those local customers is both financial resource and time intensive, the retailers who do undertake to embark on such a journey seek clarity and long-term stability in the selected new country?s retail and distribution policies even before they can commit to any investment.
Single versus multi-brand: To some, multi-brand retailing may only seem like an extension of single-brand retailing and hence there could be a temptation to tweak the government policy for single-brand retailing and apply it to multi-brand. Typically, single-brand retailers purvey a much more homogeneous selection of merchandise across their global operations so as to retain the ?core? of their brand?s promise. They deal in fewer categories compared to multi-brand operators and have to deal with a small set of producers. Their supply chains are also, generally, much simpler than retailers dealing in multiple product categories, across multiple brands.
If the government?s current policy for multi-brand retail is examined in the context of these very fundamentals of international, corporatised retail, the impracticality of the various stipulations and riders would become very obvious.
Hence, before the government comes out with any further clarification justifying the various clauses of its flawed policy, it may be more desirable if these policymakers were to go back to the basics of modern retail and then come back with a more practical policy framework that makes it feasible and attractive for international retailers to invest in India, while also providing adequate safeguards to protect the interests of the millions of very small independent, micro retail businesses in India and, at the same time, provide a much needed fillip to domestic manufacturing industry.
(Tomorrow: The ideal retail policy) The author is chairman of Technopak Advisors Pvt Ltd. arvind.singhal@technopak.com