Shoppers Stop?s former chief tells Shobhana Subramanian that the rules for FDI in multi-brand retail should be more friendly.
They should differentiate between back-end investments in food retailing and non-food retailing, for example The last time we met to discuss the state of the retail sector, Wal-Mart had just set up shop in India. Even then, BS Nagesh, who was running Shoppers Stop, was sure that a few more foreign chains would soon find their way into the country and bide their time till they were allowed to roll out retail outlets. So, with the government readying the rules for FDI in multi-brand retail, I decide it?s a good time to pick his brains on the proposed guidelines. Nagesh, meanwhile, is all set to launch a corporate trust?Trrain?set up with his own savings, which will help small- and mid-sized retailers and their employees. It?s his way of giving back to the industry to which he belonged for so many years, he tells FE. Since he has a lot more time on his hands these days, Nagesh actually drives down all the way from the western suburb of Andheri to Royal China. Even though it?s way past 2 pm, the place is so full it?s hard to hear anything above the din. I actually place the recorder on top of a tall glass, fearing I might otherwise miss most of what he says, mentally making a note never again to host a lunch here. The food, I hope, will compensate; I ask for some dimsums?water chestnuts and shitake mushrooms?and some steamed vegetable dumplings.
Nagesh is not sure that the rules being framed to allow multi-brand foreign retailers to invest directly in the country are friendly enough. To begin with, the government needs to differentiate between back-end investments in food retailing and non-food retailing. While the 50% investment in the back-end infrastructure for food retailers is not an issue, he questions the need for 50% of the total investment being spent on the back-end for the non-food piece. Since there is no cold storage involved, such large sums are not really needed
to set up back-end infrastructure, for other merchandise like apparel; for instance, a Harrods or a Selfridges could easily spend $200 million or even more doing up the stores because they would need to look good, but they wouldn?t really need to put in as much money to invest in the back end. Given that the returns on capital for department stores are lower than those for hypermarkets, Nagesh believes it?s a tad unfair to have a common investment proposition for both formats.
Also, since it was FDI in food retail that had been opposed, the government, he says, could have considered having slightly more lenient norms for the non-food business. ?There are hardly five big players globally in the food space whereas there are many more in the non-food segment, so there should be some differentiation,? he says. But even before the debate on how investments should be channelled, Nagesh believes that foreign retailers would want some assurances on being allowed to open stores across the country without too many restrictions. While the rider relating to opening stores in cities with a population of one million should be fine, the caveat that foreign retailers would also need to seek the blessings of every state government, even after the central government okayed FDI in multi-brand retail, could make it difficult for them to convince their boards, he feels. Moreover, it would be difficult and expensive to run a retail chain without access to major markets in the country since the cost of setting up distribution hubs is high. Given that organised retail is such a capital-intensive business, Nagesh believes new entrants would want to be sure of the ground rules before they commit themselves. If the rules aren?t changed, his guess is that the players who will come in are hypermarkets who are already in; the strategy would be to have a franchise?an Indian partner?for the front-end in those states that don?t open up to foreigners.
We?ve polished off the dimsum and dumplings and decide to get the rest of the ordering out of the way. Nagesh stays with some aubergine in a spice sauce while I ask for some fish in wine sauce. A sporty person, Nagesh no longer plays either badminton or billiards which he mastered while in college, but does hit the gym regularly; he wanted to join the army but ended up at the Benares Hindu University. Although not much of an eater, he quite likes to spend time in the kitchen rustling up a meal for his family or friends. His father, he tells me, was very particular that he learned to cook, and that training helped during his days in hostel. Nagesh?s specialties are stuffed capsicum, egg curry and varieties of rice. The only dish he doesn?t try out, he confides to me, is ?bisi bele huli anna? from his native Karnataka and it?s not hard to guess why: no one makes it better than his wife.
Why haven?t the Indian organised retailers managed to get it right, particularly in the food segment, despite some of them putting in big money? One has to understand that the business has to be built over a very long time, one can?t hope to do it in a few years, says Nagesh, pointing out that rentals are high and the Indian consumer, unlike his counterpart in the West, needs a wide variety when it comes to groceries, condiments and ingredients. ?If one opts for small supermarkets or food stores, it?s not possible to offer width because there?s no space and consequently the revenues don?t kick in.? Nagesh recalls how Shoppers had opened five Expresscitys in Jaipur but closed them within seven months. Even when it comes to larger food stores, say a 25,000 sq ft outlet, while one can offer a bigger variety of products, the problem is that Indian consumers don?t really pick up very large quantities at one time so there again it?s hard to grow sales. Of course, as he says, there?s also the fact that organised retail is a high-cost business and it?s not always easy to keep up the investments till one builds the
necessary scale.
After some deliberation, we decide to share some ice cream with lychees?probably the least sinful of the desserts on the menu. Nagesh confesses he has a sweet tooth?at one time he wouldn?t think twice about eating three gulab jamuns a day?but he?s being more careful these days. Are there any new learnings, I ask? Retailers, he says, find that fewer couples today want to turn the visit to the hypermarket into a family outing because they find it hard to refuse their children?s demands and are left spending more than they would like to. The other issue, he tells me, is that it?s difficult for couples with two-wheelers to carry home large packages and, with autorickshaw fares having gone up, they can?t afford that either. Indeed, given that most Indian housewives are able to find the time to shop almost everyday at the neighbourhood vegetable vendor, supermarkets don?t really have much of a bait with which to lure them. More so in the evenings when the vendor is looking to dispose of as much of his stock as possible before it perishes and so is willing to drop the price. As Nagesh points out, there are no differences today in the sourcing efficiencies between the cart vendor and that of an organised retailer, so the former actually has a bit of an edge. Which brings me to the point that the monopoly of the mandis too seems to be a bit of a bottleneck. Nagesh agrees, saying organised retailers should be allowed to aggregate the produce at the farm gate rather than at the city gate. Moreover, he also feels that the government should not insist that retailers earn 30% of their revenues from sales to small traders because that would be more like a cash and carry operation.
Nagesh himself is all set to help smaller retailers?he will soon kick off training schemes for their employees and also come up with financial products for people across the retail sector, whether with a kirana or a department store. Trrain?s board, he tells me, has as many women on it as men. I wish him luck with his new venture; there are many people who want to earn and learn but few who want to earn, learn and return.
