FDI Curbs Dont Deter Retail Lure

New Delhi, December 21: | Updated: Dec 22 2002, 05:30am hrs
Global consultancy firm AT Kearney has rated India as the sixth most important destination in the world for investors in the retail sector. While skeptics may be dismissive of such reports considering the constraints being faced by the sector and no clear policy yet in place on foreign direct investment in retail, the good news is that there is a silent revolution taking place in this sector.

Organised retailers like Foodworld, Metro and Giant are relying on economies of scale to be competitive against traditional kirana (small neighbourhood shops) retailers. They are using their purchasing power to negotiate directly with farmers or producers. What they are cutting out are much of the up to nine layers of intermediaries to save costs and losses. The producer is a winner too, as he has a dedicated customer assuring price, payment, offtake and even helping out with production forecasting and technology.

The big retailers are even setting up their own distribution hubs and transport systems. And guess who forms a segment of their customer base Your neighbourhood grocer. Believe it or not, often the grocer finds it cheaper to buy from his big competitor than the usual intermediary. This development can also help address fears of the big fish swallowing the smaller ones in the market.

AT Kearneys principal consultant (consumer and retail) Sue JF Evans says the challenges to organised retailing in the country are similar to the ones faced earlier in countries like China, Taiwan, Korea and those in Eastern Europe where all formats of retails are flourishing and growing side by side. These challenges included a well entrenched competition, a close relationship between shop owners and customers, and little premium for convenience as housewives usually have a surfeit of time on their hands. Then a typical basket size would only be five-seven items, unlike in the West where shoppers tend to stock up for weeks at a time. Despite this, organised retailing helped grow the consumer movement, leading to a rise even in the mom and pop stores. There is no reason why the same cant happen in the country.

Realty consultant Cushman and Wakefield executive director Sanjay Verma says growth of organised retail is slow in the major metros due to lack of quality and affordable real estate in catchment areas which ensure high footfalls.

Ms Evans says its one of the reasons why fewer superstores will come up downtown, but more in the suburbs. They cant be too far out of the city due to low mobility of their customers.

Another reason why retail will thrive is to consider just the top 10 states, each of which would have a minimum per capita annual gross domestic product of Rs 2.5 lakh. Countries like Thailand and Malaysia have organised retail penetrations of over 15 per cent at such GDP levels. If the country emulates these countries, we are talking of a 30-fold increase from the current 0.5 per cent level. In some cities in the South, however, the organised retail sector can actually have up to a 40 per cent market share.

Companies like Metro are also rolling out cash and carry operations by early next year. These will be like traditional stores, but only selling in bulk packs and aimed more at the stand-alone stores. Although strictly a B2B model, end consumers can also buy here if they are willing to buy six cases of coffee at a time rather than just one.

Ms Evans is confident that FDI in the retail sector is more a case of when, and not if. The arguments in favour of the same are too strong. Only two of the top 10 retailers in China are foreign-controlled. The retail sector is the highest employer in most countries. Once foreign chains establish a relationship with India, they can well use it as an important sourcing base, boosting the local economy and exports further.

The interesting point is that most organised retailers favour FDI, as they feel the market can grow for all.

In India, the signs are already good according to the research done by AT Kearney. Between 2000-05, the number of outlets of chain stores will quadruple to nearly 2,000. International chains like Carrefour and Dairy Farm are already keen on India, as are business houses like the Tatas, ITC and the Birlas. Discount chains like Subhiksha are already a major hit in the South.

Watch out for the India in 2010. We can see modern, efficient discount superstores, hypermarkets and warehouse clubs around us. But you may have to travel down South to see more of it, for that is where the action is really happening.