Thursday, December 15, 2011

FDI in Multi-brand retailing in India


Recently there was a proposal to allow foreign players in the Indian multi-brand retailing sector which was eventually rolled back due to political pressure. Here is an opinion with regard to the development.
There are 5 stake holders in this process.
1.      Ordinary consumers like you and me
2.      Ultimate producer like farmers, small scale industries, big conglomerates like Tata, reliance, ITC and everybody in between producing apparel, shoes, house wares, toys, soft goods, knick knacks and everything that is typically sold in a super market.
3.      Middle men like commission agents, and agents in the procurement chain and sellers through the distribution chain including huge distributers, wholesalers, retailers at various level etc
4.      Foreign owners of multi brand retailers like Bharati-walmart,Tesco, Carrefour etc
5.      The homegrown multi-brand retailers like Pantaloon (Big Bazaar, Shoppers Stop), Tata ( Westside) etc.
The proposal to allow foreign investment into multi-brand retailing essentially means allowing stakeholder number 4 to open shops in big cities in India. If the investor-retailer like say Walmart does not make any stupid mistake, entering a market like India is very profitable. It makes complete sense as the developed markets are already saturated and aging therefore cannot offer returns the way a younger, growing, more recently prosperous ( at least certain segments which incidentally happens to be as big as the entire population of say Germany, Australia and United Kingdom combined) and not to mention a more populous economy like India can offer.  


For other stake holders it means,
1.      Bigger investment, construction of large stores like Wal-Mart in India, product sourcing and distribution network, an array of construction including warehouses, front end and back end operations etc.
2.      Jobs created in the scope of all the above mentioned areas and more.
3.      Improving efficiency due to scale of operations, they are just too big and their size should allow more efficient operation.
4.      Consumer stand to gain because competitive pricing, better choice and convenience- Imagine going to 10 different shops or going to one huge Wal-Mart.
5.      Producers stand to gain because they can bargain directly with the retailer, eliminate middle men and therefore enjoy better price realization. Apart from better price realization, larger and more stable order will enable the best of producers to become more efficient and eventually more successful. If they are indeed very efficient, they can become suppliers at the global level. I mean Wal-Mart becoming a platform for XYZ company which is very efficient in say producing steel tumblers to be able to sell its products in Wal-Mart all around the world.
6.      More investment will bring in modern supply chain management practices. (Hindustan Unilever has done an awesome job in  this regard but the scope for  improvement is enormous ) Again improving efficiency and thereby benefits to most stakeholder. Think better management of perishables like tomatoes. We hear price of tomatoes crashing and farmers abandoning their crops by the truck loads on the highway. A big retailer can offer farmers offer to buy certain quantity of produce at certain time at a set price. (contract farming) Quite easily applicable to apparel and many other sectors. The idea is that the producers will enjoy better price stability and fewer market gluts and associated losses.

Problem with the proposal
1.      The ground of operation for middlemen will gradually erode. This won’t happen immediately but over a period of time. If the system can work better without them they will be gradually eliminated; That is, if they are something called 'dead weight loss' neither beneficial to producers nor consumers.. But they cannot be eliminated completely because there will always be pockets that are not served by the big retailers.
2.      The home grown retailers will face increased competition. Because the target is the well healed and Indian consumers are crazy about anything ‘imported’ the concern is very real.
Implication:
3.      If the government wants to protect the middlemen and other supply chain inefficiencies, they are shortchanging the other two stakeholders- the producers and consumers. From what it looks the consumers lack the lobbying power of the traders-middlemen and therefore loose most. Producers do not what to irk their traders-middlemen because the competition out there is brutal.
4.      The greater lobbying would be by the existing multi-brand retailers. We know that our home grown conglomerates are not all that fair. They are there to make money at what ever cost. We know now that the Ambanis can bribe their way through our political system to procure public goods at a discount. They launder money and do everything to protect their interest. And they cannot be held accountable judicially or legally. Same with our other conglomerates. After all they are the chief patrons of our political elite.
5.      Mom and pop stores the protestors say are going to go bust. Well it is hard to say. To think of it this way, the Kirana shops have been there for ages because of a reason, convenience -they are often located in the neighborhood of the consumer, they offer credit facility which organized retailers cannot, unless you have a store branded credit card which obviously not everybody is eligible for. They are very competitive in terms of price and service. They offer personalized service and home delivery which a big box retailer can never. They know their customers; can make drastic changes in their style of operation, management. They are way more agile than big-box retailers. Janta Bazaars are dinosaurs but Kiranas are still around and are doing as well as they had been before, may be even better. On the other hand, they will never be able to offer the kind of product assortment and choice the big retailers can offer.
6.      The political debate is just political, not technical nor economic. Election is nearing and all our damned politicians want a piece of populist pie. They are not worried about the 'Aam admi', they never were.
7.      Have you noticed that just because Reliance opened a huge vegetable shop (what ever it is called 'fresh' or something, the vegetable-fruit supermarket I mean) did not lead to the extinction of vegetable market at 9th block Jayanagar or the vegetable vendors on the push cart. It just leads to more choices to the consumer. If you are price conscious and quality conscious you will probably go to reliance. If you get down a bus at 9th block and do not want to go that extra mile you will probably buy at 9th block and if are at home and do not care much about what you might get but do not want to step out of the house you will buy something from the push card vegetable vendor at your door step at a more steeper price. So they are all there very much still in business.
The story here is that there is scope for everybody in the business. The pie is huge and it is growing! Is our population slowing down any soon? No and our wants are anything but reducing. Allowing foreign retailers means better integration with the rest of the world and more choices for our consumers and better price realization for our producers, yes we will see some inefficiencies reducing. Home grown retailers will be forced to be more efficient and middlemen will have to find something else. This is a brutal world that is not forgiving. We all need to fight for our bread. Why should a political favorite be given an easy life when the rest of us are working hard?
 But politics is so much about sticking to power rather than addressing the aspirations of voters. Who can help these self centered politicians? I wish (due regards) Anna Hazare sticks to ‘fasting against corruption’ and stop talking as if he knew what he was speak out against. It is indeed tragic that the proposal was withdrawn, a sad victory of meaningless politics over meaningful economics.


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