Notes on FDI Retail - International Experience and Supply Chain fallacy

A good summation of why retail stores have failed in India:

Three big reasons why organized retail does not make money.  

One is the cost of real estate. These stores typically operate out of better buildings along the bigger roads, unlike kirana stores that operate out of older buildings on small streets.  

Second is the cost of people. There’s a constant churn of store staff because of difficult timings, long hours, weekend work. And new hires will always come at higher costs. The kirana stores are run typically by family folk who do not mind the difficulties. 

The third reason is that 60-70 per cent of the items in a store are packaged, branded items that have to be sold at MRP (or below that during promotions), and where the margins are low. Most of the remaining 30-40 per cent consists of fruits, vegetables and dry groceries (grains, dals, etc). [Internationally, that’s where big grocery chains make money. But in India, that’s a space with lots of competition, thanks to the kiranas and pushcarts.]

Source

From Abhijit Sen, Member of Planning Commission

Couldn’t foreign direct investment (FDI) in retail help improve the supply chain and, therefore, inflation? 

My honest professional opinion is that the supply chain problem would remain, FDI or no FDI. Why aren’t supply chains better already? The return on investment made into improving supply chains has been rather low. There have been Indian players who put in a lot of money into this a long time ago. Most of them pulled back. 

Now you think those people have some technology, suited to Indian conditions, which can solve such a huge problem in Indian conditions. I’d like to see that technology and why no Indian company has been able to do it. If there were such a technology that could have solved the supply chain problem, it would have happened long back. 

Could wastage not be stemmed by more investment in cold chains? 

We have high losses, but we have also had a history of exaggerating losses on the supply chain. If the actual losses were that high, the returns on investing in cold chains would have also been high. 

People are underestimating the jugaad in the existing economy. The proportion of the Indian consumer’s spending on produce that the farmer gets is higher than what the American farmer gets out of the American consumer’s spending. The processing, packaging and the infrastructure you’re talking about is what adds to the cost of the produce for the consumer.

A superb take on the matter on hand. Source

For the other perspective: Pradeep Mehta, Sec Gen of CUTS (Excerpts)... my comments in italics

Negligible crowding-out has been observed due to big domestic multi-brand retailers. Although consumers have largely benefited from retail chains, the expected benefits have not reached farmers. This is mainly because domestic players (or governments) have failed to create adequate back-end infrastructure to provide for seamless flow of produce from farm to fork. Multinational retail chains are equipped with experience, skills and technology, and have built good supply chains. 

The Farm to Fork myth. That's beautifully explained by Abhijit Sen above. Do we really need to trumpet it once again?

China is now losing its advantage due to rising labour costs. In any event, we need to improve on our infrastructure, utilities, interest rates, transaction costs and trade facilitation. Once these reforms bring down the cost of our manufactured goods, we can expect global retailers to source domestically and export to their chains outside India. Irrespective of FDI in retail, domestic manufacturers would have to pull up their socks to compete with countries such as China. 

So they do agree India will turn into a dumping ground for cheap stuff. And if few thousand companies shut down in the name of competition that fine.

Permitting FDI in retail is likely to open new opportunities for farmers, particularly for those dealing in fruits and vegetables. Studies show that profit realisation by farmers can increase up to 60 per cent when the produce is sold directly to organised retailers, as compared with selling through mandis. 

I love these arguments. Funnily, they never mention which studies. :)

In addition, FDI in retail and subsequent creation of back-end infrastructure would reduce wastage in perishable food items like fruits and vegetables, estimated to be 25-30 per cent. Consumers would benefit for not effectively footing the wastage bill. With the elimination of middlemen, food inflation would be brought under control, thus benefiting consumers.

Yawn.. refer Abhijit Sen or this paper 

First, by not allowing FDI in retail we are sending out a wrong message to all FDI, and not just retail. We need huge investment in infrastructure which will also assist retailing, such as power, roads and supply chains. 

Kinda sounds like a threat.

Second, when Indian enterprises are faced with domestic competition they improve. Indian organised retail chains need to face better competition, and grow to become global chains themselves. 

Ya, what good is a Indian global retail chain? Oh wait, Ambani, Biyani, Tata and Mittal! Yeah!

Thirdly, States have been given the option to allow FDI in retail, so why the resistance? 

From CUTS themselves "In order to develop healthy competition for investment, each state must adopt the best practices prevalent in the others and identify policies that will have the maximum impact on the development and spread of organised retail in the country." 

But nothing CUTS says infuriates me like this paper here; all well-intentioned checks and balances but something that can spiral into sinister retrograde steps. Here are two especially infuriating "Recommendations":

Licensing policy to large scale retail 

A proper licensing policy needs to be designed and licenses should be distributed on the basis of the definition retail outlets and based on population under a single municipality. License can be distributed through auction to avoid any kind of malpractices as a part of crony capitalism. The entrant may be asked to make a presentation before regulatory authority to get license by demonstrating their game plan that conforms to urban commercial development. In case of expansion/joint venture, incumbent may also ask for similar presentation before the regulatory body.Penalty provisions should be there including withdrawal of licenses in case of violations of terms and conditions of licenses. 

This stinks of oligopoly. And why in God's name should Government get involved in license raj when the proponents' main thesis is of encouraging competition. Unthinkable.

Establishing a  State Retail Regulatory Body 

There is need for a regulator to oversee the functioning of the modern retail outfits and the constraints faced by them in their dealings for procurement of supplies, taxation structure faced, infrastructure inadequacies, etc. The regulations should be made on the following lines:

• Choice of location and modus operandi of the retailer

• Provision of  oversight regarding the business practices of retailers

• Hours of operation

• Specific tax  laws/differential tax structure for large retail outlets to encourage  organised retail as well as boost revenue of the state.

• Inter-state retail trade 

• Business strategy of the retail chain to protect producers’ (mainly  farmers and small scale enterprises) and consumers’ interest, particularly relating to anti-competitive practices

WHY do you want to put regulations on the industry that you want to liberalise? Why take retroactive step by creating hurdles for large retailers that doesn't exist today? If the large MNC retailers are really harmless as CUTS makes it to be, why even bother regulating the angels?! Especially when CUTS generously gives us a big list of clearances that a retail store needs. Some zoning laws may be necessary but this stinks.

CUTS paper

Click to enlarge

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We happened to discuss Malaysia as possible success in retail, hence wanted to check that out. Fact being that Malaysia has 100% FDI with a similar economic profile was significant. Here is what I find. -

Like much of Asia, Malaysia is in love with mega-malls, and many urban consumers choose to spend their money at the high-end Pavilion or Suria KLCC rather than local family-run shops, as would have been the case not so long ago. 

Add to this the fact that large foreign hypermarkets such as Tesco and Carrefour are now dominating the retail landscape and it is easy to see why many local players – who may lack the requisite expertise and financial resources – are finding it difficult to compete. 

These large foreign retailers have been expanding aggressively in Malaysia, ousting many local players from their former leading positions on the retail ladder and further fracturing an already fragmented market.

And,

As grocery retailers – particularly the hypermarkets – begin to stock non-grocery products like clothes, furniture and home appliances, they are also encroaching on the traditional domain of non-grocery retailers.

Source

Well, frankly I wouldn't have expected it any different. Least surprised, just an additional confirmation. Then, if these big companies are raking in big money won't they be creating new interest and new players. But reality seems different, or to be precise, more rational and exactly what we expect in India too.

On the topic of foreign direct investment (FDI) in the Malaysian retail industry, he (Tan) disclosed that there had been no major retail FDI in Malaysia recently as large retailers were not that keen to invest in the Malaysian retail market due to its limited market and consumer size as compared with our neighbours such as Thailand and Indonesia. 

“However, there have been numerous branded specialty retailers that have entered Malaysian shores during the last two years, they include Michael Khors, Steve Madden, French Sole, DC, Uniglo, Muji, Garret Popcorn, Inglot, Pantry Magic, Melvita, TWG, Victoria’s Secret and H&M will be opening soon,” Tan revealed.

Source: (industry promotional non-sense but wth)

This is what we expect. Indian market is too mature and probably not easily penetrable for multi-brand large formats. However, single brand niche products like Ikea, Zara etc will have huge scope for presence. Simply put, that would be most rational form of evolution. But that is non-farm, what about farm? Here is a further take on Malaysia:

Another opportunity recently unveiled by the government aims to protect local fruit and vegetable growers. In late March, the state announced that as of 2015, farmers’ markets and National Agribusiness Terminal (Teman) outlets will no longer be allowed to sell imported fresh produce. 

According to data issued in late March by the Ministry of Agriculture and Agro-based Industry, some 40% of vegetables sold at the Teman outlets – centres set up by the state to market agricultural products – are imported from neighbouring countries. 

As most of these vegetables are grown in Malaysia, the move by the government may not encourage the development of new product ranges, but it should help growers by reducing competition and giving them a stable market. A possible downside of the new policy, however, especially if it was extended to restrict fresh food imports beyond the limited scope of the farmers markets and Teman outlets, is that retail prices could be pushed up, as some of Malaysia’s neighbours have lower production and labour costs.This could be offset to a large degree by improvements in economies of scale and efficiency, with higher production and turnover, as well as technological advances, helping to push down costs. These savings could then be passed on to the consumer. 

Over the past 50 years, the Malaysian economy has become far more diverse, moving away from a time when agriculture accounted for 30% of GDP and provided employment for half the workforce. 

While the government wants to see agricultural output increase, it is likely that other sectors of the economy will continue to outstrip rural production. By promoting smarter farming, and seeking to supply niche markets, Malaysia will come closer to achieving food security and increasing earnings.

Source

Doesn't matter if you din't read it because the ground realities are different compared to India. However, the interesting factor is that Malaysia is "moving away" from the farm economy which employs half of the workforce. A definite trend in consolidation, obsolescence, and highly productive smart farming. 

So where are the jobs getting created? In manufacturing (37%), Construction and Services (~20% each) and Skilled-agriculture & Fisheries (~10%)

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For more on Malaysia  (more here, charts here)

This job creation in other sectors doesn't look exactly fetching for India given the large population. May be Malaysia is not the best poster-child for Indian retail debate.

Pertinently, Malaysia can afford to "move away" from farming because of its good manufacturing presence, coupled with good service. It is in this matter the karma of 65 years comes to bite India, it has hardly done anything to prop up the manufacturing sector. Where are the alternative jobs for the job losses that will occur due to better technologies?


How does other countries look with regards to FDI? Briefly tried to look at how Retail and big MNCs have played out in other countries. Here is a snippet of report about retail in Thailand and South Africa.

Retail in Thailand:

 Retail in South Africa:

Source:

Interesting that same themes seem to consistently play out in most countries:

a) Fierce and protracted local opposition

b) Large scale expansion by large MNCs

c) Local operators steadily loosing their marketshares