Respected Sri G,N, Karur, Prof L.S.Patil , Prof S.B.Gavimath, faculty colleagues, students, ladies and gentlemen, Good Morning and Thank you very much for this opportunity. FDI in retailing has been a topic of discussion for ten years now. With every change in policy or Government the topic gets revived and becomes important. Today FDI in retail is a current issue and an important topic and I am blessed to have inaugurated a seminar on this topic.
The topic is important for many reasons. Existing stores, consumers, suppliers, nearly everyone is impacted by FDI in retail. The impact is on both the economy and society as a whole. The size of the retail market is forecasted to grow from rupees 23 lakh crores in 2011-12 to 47 lakh crores in 2016-17 according to an ASSOCHEM survey. This makes Retail a very important part of the economy.
There is a huge untapped opportunity in the retail sector, thus having immense scope for new entrants, driving large investments into the country. A good talent pool, huge markets and availability of raw materials at comparatively cheaper costs are expected to make India lead one of the world's best retail economies by 2042.
We are a nation of shopkeepers with 11 shops for every 1000 people, 97% of the number of stores in the unorganized sector. Retailing has been growing at a hectic pace thanks to continuing urbanization, growing middle class, and macro-economic growth. Organized retailing is also having a steady growth and is possibly accounting for a major part of the sales growth of retailing in the last couple of years.
The possible impact of international retailers coming through the FDI route is like many things in life: a mixed bag.
Positive impact of FDI in retail
The major advantage of the large retailers is that they have access to efficient supply chains, which can reduce prices for customers. Many jobs within the retail industry and with those providing support to organized retailing will be created. Sales associates, people greeters, store managers, back-end positions across the supply chain in purchase, vendor development, accounting, mall maintenance, food technology, support services like Interior designers/decorators, packaging design and supplies are some of the new employment opportunities that have started to emerge. Large international retailers will bring greater professionalism and global best practices in all these areas. Large scale employment will be created by allowing FDI in retailing. It is estimated that 1 crore jobs including direct in retail and indirect like in the supply chain, packaging sectors can be created during this decade.
The farmer is likely to gain by reductions in wastage, and better realizations for produce. Good farmers might get access to foreign markets too, through these global retailers. Contract farming reduces risks and improves realizations and mitigates credit needs for farmers.
Small and medium enterprises that supply ‘private label’ products to big retailers will find opportunity without the large advertising budgets required for brand building.
Supply chain efficiencies will benefit society at large. Better Post harvest technologies will result in lesser wastage and fresher fruits and vegetables. A good cold chain will be very useful to reduce seasonal imbalances and reduce geographic distances for fresh produce.
According to Wal-Mart, “Wal-Mart’s impact on local business is based on the philosophy of operating globally and giving back locally. Studies show that new businesses spring up near Wal-marts and existing stores flourish as they take advantage of the increased customer flow to and from our stores. ”
Kenneth E. Stone, Professor of Economics, Iowa State University; Georgeanne Artz, Extension Program Specialist, Iowa State University, and Albert Myles, Extension Professor, Mississippi State University, in their 10 year study of the impact of Wal-Mart on smaller cities; which probably is the basis for Wal-Marts statement, developed two primary conclusions that are worthy of note.
“The entry of a new super center in a community can have dramatic implications for existing merchants. Two general rules-of-thumb summarize the economic impacts of a new super center on local merchants: Rule-of-thumb 1: Local merchants that sell merchandise different from the super center or other big box stores tend to fare well and may gain sales as the additional traffic generated by the big stores spills over into their stores. Rule-of-thumb 2 is not so pleasant: Local merchants that sell the same merchandise as the big stores will probably face a reduction in sales because of the difficulty in competing with major chains.” Competition will only benefit the customer. While many, including large Indian retailers have confused low prices with greater value, International retailers will hopefully provide better value. We can definitely see better customer service, greater depth of merchandise, more convenient store timings, better packaging, and reduced rejects at these multinational retailers.
It is likely that much of what has happened in other countries in the evolution of retailing will repeat itself in India. Different formats will co-exist. It will be a long time before the handcart vendors of fruits and vegetables will disappear, specialty stores, halwais, and services like dry cleaning will continue to grow. Kirana shops that accept the new reality and reinvent themselves will survive and the inefficient ones have to go.
For the Government purely from a tax collection point of view organised retail which includes international chains are a great advantage as small shops do not maintain proper records and many do not pay all the taxes. In terms of compliance and cost of tax collection, large stores will be preferred by governments.
The Customer gains
Another dimension is that most of the value created by the International retailers is actually pocketed by its customers in the form of lower prices. According to one recent academic study, when Wal-Mart enters a market, prices decrease by 8 percent in rural areas and 5 percent in urban areas.
With FDI or large international retailers, consumers can expect greater transparency about products, better replacement/warranty policies, and best of all a much more pleasant environment to shop in. Car parking space, one stop shopping, everyday low pricing, appealing product display, wide range of products, what else can the consumer ask for?
But then, too much of a good thing must have a price!
Negative Impact of Big international retailers
The greatest fear about FDI is that small Kirana stores will be out of business soon, putting millions of ‘dukandar’ families in crisis. Remember that many of these families have run shops for generations and might not be trained or prepared for anything different from ‘dukandari’. The fear is well founded. Researches in many communities in USA, and in Poland have established that big box retailers do kill many small retailers. Organized retailing also means much lesser people are required per unit of sales (efficiency!), which will cost society at large, in terms of unemployment.
The study carried out by Kenneth E. Stone also confirms the negative impact for those shops carrying the same merchandise. What does a typical Kirana store carry? Rice, Wheat, Dhal, cooking oil, some local condiments-all well suited for large discount department stores.
That price will be less is also likely to be a misnomer, especially if one goes by the experience in Food-world and other such chain stores. Usually the big box retailers will have a ‘loss leader’-a popular product at a low price, well-advertised to attract shoppers. Everything else will either be on par with small stores or more. People see the prices for the few popular items and assume that all prices are low. In course of time these large retailers will invest in more people, interiors and supply chain so much that they begin to become inefficient, passing on the burden of higher prices to consumers.
Recent studies on contract farming in India have brought out many issues in terms of pricing, large scale movement to genetically modified fruits and vegetables and higher density of plantation.
Another aspect of FDI is the increased use of ‘private label’. Earlier I had mentioned the benefits to small manufacturers, but there is also the aspect of a very large buyer exploiting small manufacturers. Whenever ‘private label’ is discussed it is only as greater margin for the retailer, never as lower prices for the customer.
After the entry of large scale Indian organised retailers, employment has been created and this may grow if FDI is allowed, however these are really low paying jobs being created whereas one entrepreneurial class is getting into trouble. Are creating servants by killing small business owners is another way of looking at the employment issue.
In the USA over a short period of 50 years traditional mom and pop stores established over 400 years have been systematically replaced with chain stores. In India traditional retail has been around for a couple of thousand years and organised retailing is growing at 25-30 % per annum taking share from traditional retailers. This is an extreme view according to many; however such a view does exist.
It is a good topic for debate
Having seen the positive and negative aspects, it appears clear that this topic is worthy of debate as both those for FDI and those against have good arguments. It all depends on the vision and objective one chooses for the nation.
India is probably the only place we have categorised retail into Single brand retail and Multi brand retailing and quite separately media and e-com companies are trying to categorise online retailing as distinct while the government view is that online is not different from brick and mortar as far as FDI policy is concerned.
Initially cash and carry wholesale was allowed and many brands like Metro cash and later Wal-Mart did come in. Later single brand retail was allowed and some brands did enter through this route. In the last days of the UPA government, the parliament resolved to allow FDI in multi brand retail, however none of the large multi-brand retailers have applied for permission to invest. Even before the 2014 elections the BJP as a party and each its leaders, Smt.Mamta Banerjee, Sri.Nitish Kumar, Smt. Jayalalita, had all spoken about reversal of the FDI decision after the election. In recent times Smt Nirmala Sitaraman the commerce minister has issued many statements clarifying that the Government stand is not in favour of FDI in multi- brand retail for now.
Challenges for the Retail industry
One of the biggest challenges for the industry will be that of skilled manpower and it is a great opportunity for educational institutions. Skill based programs to create manpower for the retail industry will be needed in a large scale.
Supply chain will continue to be a challenge because of infrastructure shortages, poor quality of roads and the large number of intermediaries especially in the agricultural sector.
Another challenge faced by organised retailers has been that of the number of clearances required to start a store. Many government departments are involved and it becomes very difficult.
Retail is not considered an industry and so getting funds from banks and financial institutions is difficult.
All these challenges are for organised retail and will continue whether or not FDI happens in a big way.
What is likely to happen in the future?
There are many books on how independent retailers can survive the onslaught of big retail chains. The way is through better customer service, personalized service, unique product assortment by identifying niches in the market (and there must be many considering just the sub-cultures that form a city/town), and most importantly improve efficiency in purchasing and managing inventory professionally.
Research opportunities
The opportunities for research in this area are plenty and important. Potential impact of FDI in multi-brand retailing, impact of FDI in single brand retail, e-commerce, operational issues in supply chain and retail marketing including branding strategies, location selection in India, Product standardization and regional product variations, Changing consumer behaviour is in itself a large untapped area for research. We see consumers buying behaviour is changing, consumer expectations are changing, customer decision making is changing with pester power of children taking control in many categories, the number of areas is really huge and I am happy this topic was chosen for today and wish it will encourage research in the area. I wish the seminar every success and I am sure all of you will have a wonderful two days. Thank You!
Dr.G.P.Sudhakar, www.gpsudhakar.blogspot.com
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