FDI in India.
Well, my thought on FDI in India. I am not going to be judgemental and tell whether it’s good, bad or ugly. I leave that part of it to the media houses who are working overtime just to decide which side they want to take. On one side, politicians and political parties they support, on the other the much needed advertising revenues that will come from such large retailers.
Coming to the point, FDI in India I will start with the much talked about companies that first come to our mind – Wal-Mart, Tesco. It is about these large retail chains which have bested the art of supplying daily needs to customers without even a need to have a store front with the lowest price guarantees. But if you ask me, will it work in India with the current business model they have. They are a success in US and UK primarily because of the hub and spoke model of the cities. You have the downtown and the suburbs. Downtown has the shops and Suburbs has the homes, so people come downtown to buy in the malls, or the super stores of the Wal-Mart’s and Tesco’s. But India is different in this aspect; we have one city which lives along the railway line running from north to south and splits itself into east and west depending on which side of the line they lie. Another which has developed concentrically around its heart and is now struggling to even connect two places without disrupting life. So it happens that there is no single place where a warehouse can be kept and the whole city serviced at one go. That’s where we have found so many millions of mom and pop stores, popularly called kirana’s, managing to stay in business and flourish with the competition and the increasing consumer base.
So looking at the retail scenario in India, we are looking at a market cap of close to $470billion and growing at a CAGR of 7.5% we are looking at quite a sizeable and large market. But what percentage of this is organized retail? According to latest studies it is just 5.5% i.e. $25billion share among Nilgiris, Spencers Daily, ABG More, Reliance Fresh, Godrej’s Nature Basket and around 4 other players. Now this is only the 15% population in Tier 1 cities, which in itself is 5 cities in India as A1 and 13 cities above 2million population. What I am trying to say here is that, going by numbers it doesn’t make sense for the large retail players to play alongside the existing retail chains. The largest losers will be the small retail chains and not the kirana’s actually. But then it’s India, the magical name in the current scenario in the world. With every company dreaming to setup something in India, retail chains are not far behind in following.
Look at the options that IKEA can give us. Knocked-down do it yourself furniture – but will that kill the livelihood of carpenters? I doubt it. Accountability, something which Indians are so averse to taking will be something that is uncomfortable for the Indian mindset to take.
Coming back to customer base in India, I still think that having more expats coming into India and more and more NRIs returning to home base, it is sure that they will get the customers they want. But then their modus operandi needs to be India specific, that’s something that needs to be done for anyone entering any business in India. Customization is key to our nation, it is what kept and keeps many away from coming here.
So moving to the other side of the retail spectrum – Supply. Wholesale agents will have a field day in procuring from the indebted farmer and selling it at higher margins to Wal-Mart instead of Reliance. But very soon Wal-Mart will want to absorb that wholesale function to itself to achieve the price arbitrage that it so fiercely tries to gain to provide the products at a lower price, rather lowest price. But small farmers, will remain small farmers, indebted to the landlords and loan sharks and just getting rid of the produce to whoever who can give them enough to feed the family the next meal. I think in a way, by having organized retail these farmers or producers will stand to gain, but only if they can stand up and defend themselves because like today they will still not have the upper hand in any transaction. The pricing power will lie with the hypermarts and large retailers and not with the wholesalers. It can never be with the farmer unless the government steps into do something about it. Private help is only available to little pockets and they cannot be there forever. Another power that these large retailers have is to regulate demand, they can increase the demand of some products that they sell and kill the demand for others who do not agree to their prices. So big or small, any product owner is at the mercy of these retailers when they step in.
Well, to sum up –
– FDI will increase the number of super markets in India, but then kirana’s will continue to grow. Something like China.
– Farmers will continue to be exploited, by bigger retailers and rich instead of the super rich wholesale dealer.
The success of retailing in India lies with changing the mindset of the masses. People want a touch and feel of the product before buying, they don’t want to risk getting substandard goods for the convenience they get (we are talking about people who use online to check availability of train tickets, but go to the counter to book). The convenience, personal touch and verbal guarantee that your neighborhood kirana gives beats the large AC showrooms and round off to the nearest paisa the hypermarts give. Co-Existence that we so very well know of, is what will prevail, so Wal-Mart’s and Karumariamman Stores will exist for the different target segments. As always leaving the middle class a confused lot.