Dealing With Competition : Challenges That FDI In Retail Pose To Indian Retail Firms

Posted on Sep 15 2012 - 5:00am by Fayaz

Introduction

FDI in retail is the hot topic in Indian scenario today getting equal attention as any of the scams is getting. Last year Mr. Pranab Mukherjee, the then Finance minister announced that FDI in multi-brand retail would be allowed shortly but was rolled back due to widespread protests by the opposition and the business community. Then the government allowed 100% FDI in multi brand retail and if again now considering multi brand FDI. The recent news of IKEA one of the world’s leading retailers which has a potential of investing a whooping Rs. 10,000 crore in the liquidity hungry Indian economy has again brought back multi-brand FDI on the table. The centre is trying its best to convince states to join hands with them so that they can allow FDI in multibrand retail.

FDI

However FDI in multi brand retail continues to be one of the most disputed topics, the reason being a direct fear of competition between small shopkeepers and the giants who are waiting for regulatory hassles to clear. Currently 100% investment is allowed in single-brand outlets & 100% investment is allowed in wholesale goods. It has been proposed that 51 % FDI limit should be set for FDI in multi-brand retail. Let us see what does this mean to India and see specific examples of countries who have allowed FDI in multi-brand retail and who have not.

 Indian Story

India is a huge market and on an aggressive growth path. The consumption expenditure of the population is rising by each passing day and this clearly shows why MNCs are so hungry to invest in India. Also multi-brand retailing will allow these MNCs to literally enter into each and every sector ranging from food, vegetables to home decor, apparels, etc.

The traditional mom and pop stores which is the lifeline of retailing in India are reluctant to the development as the direct competition with these giants may spoil the livelihood of millions. These giants promise employment opportunities but the employment lost will be far more than employment generated. Capacity to procure in bulk gives them an advantage of economies of scale, huge advertising budgets gives them recognition, international acclaim is what they bring along with them and none of this is present with small retailers. The only recognition they have is of a ‘kirayana waala’, the only advertising they have is the board they display outside their shop of some FMCG product with the name of their shop written on it.

Today organised retail account for just around 4 % of the total market share which is a very small figure. It is predicted that if the FDI is multi-brand retail is allowed this share will shoot up to 30 % in just 2 years. This is a serious cause of worry. Millions of retailers are facing a danger or being overshadowed by these giants. While Walmart has forayed into the Indian market with Bharti and operate 9 store which earn considerable amount of revenue, players like TESCO and Carrefour have presence in the wholesale market and plan to come to the retail market once regulations are diluted. TESCO has even entered into agreement with Tatas.

These giants are so keen to come to India that in a recent statement Carrefour said that it will definitely tap Indian market by some method or the other even if the rules and regulations are complicated. Low level of competition is what is driving these companies to put an eye on the Indian retail market. Fragmentation in the market is their prime target. The public also supports FDI in multi brand retail because the consumption savvy public wants more products to choose from so that it widens their choice horizon.

The government is blamed by these giants for being too strict with them and also the public is against this attitude of the government but the role of government is welfare of all. And if welfare of all is not possible than at least welfare of the side who is at loss taking into consideration the views of opposite side. Today if FDI is allowed the retailers will have to pay for the consequences more than what will be the benefits of this move.

Though there are many advantages that convenience stores have over these giants. These stores are located in every nook and corner of India; some of them provide home delivery for even a bottle of water, people have a personal connection with the store owners and they have almost all major brands of daily use.

But when we look at the mall type ambience of retail stores operated by Walmart, with numerous brands and products displayed on shelves the advantages of convenience stores seem to be overshadowed. If we talk about home delivery of products these giants are ones who are very quick to adjust to new environments. Providing home delivery won’t be a big issue for them and for places where delivery isn’t viable bulk order from many customers and other ways can be founded.

Experiences around the globe

Providing specific examples of countries we can see China which completely opened multi-brand retail in 2004. Still mom and pop stores account for 80 % of the retail sector in China. It can be said that this format didn’t affect the Chinese market. The number of small retailers has gone up overtime and the growth rate has been satisfactory. So we see a story of co existence. But can we expect the same story to be repeated in India? There are some doubts to that and it is highly unreasonable to test this because the livelihood of millions is at stake.

Another example is of Japan which has not allowed this format primarily because they don’t want their local retailers to face competition which may turn out to be significantly against their interests.

FDI: An exploiter or a partner?

So, the bottom line is that FDI in multi-brand retail can be a big threat to the unorganized market in India which though is unorganized but has never faced any major allegations of being corruptive or indulging in malpractices on a large scale. But whatever the case be it is decided that these giants will come to exploit the market. An active move by the government is required to see that both the formats co exist as was done by the Chinese government and also to check that the powerful side don’t overshadow the smaller side which will definitely need support and encouragement once these giants enter the economy.

Rest assured all decisions should be taken for the public welfare ensuring success for the opportunist without compromising growth of the weaker side which lack resources and opportunity.

The article is authored by Ricky gupta from NMIMS & Harshita Mathur from Banasthali university.

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About the Author

Fayaz is the founder of Marketing Bloggers. Apart from the jibber-jabber he is Human by birth, Engineer by mistake, Marketer by Choice.. That says it all :)

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