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Big-Box Retail – Really the pallbearer of doom for local industry & commerce?

, January 30, 2013, 0 Comments

Sentimentalist arguments against FDI tend to paint a doomsday scenario where Indian industry is subservient to foreign interests. Proponents of such arguments assume that once the floodgates open, big-box retailers around the world will start queuing up for a slice of the Indian pie. However, as recent developments show, there is not much visible excitement among foreign retailers to rush headlong into a market that has significant challenges.

FDI in Retail

Earlier, I have touched upon a few ‘enablers’ that retailers would expect to be in place – added to it are larger questions around the lack of clean, effective and accountable governance that is not conducive to the overall business climate in the country. In fact, the recent investigation into how Wal-Mart bent the law in its real-estate deals in Mexico will make retailers tread with caution while dealing with developing economies.

Opponents of FDI also propose that the Wal-Marts of the world will be confrontational in their approach to Indian industry. Implicit, in this, is the assumption that foreign retailers will be able to modify the tastes and preferences of the Indian consumer – a task easier said than done. Even two decades after the cola-wars unfolded, Mazaa and Thums Up remain top selling brands with Parle, their original owners, having diversified into other sectors taking advantage of the growing economy. Every fast food chain that enters India eventually needs to ‘chutnify’ and ‘currify’ its offerings, not due to government diktat but due to the intransigence of the Indian palate. Above all, opponents of FDI discount the spirit of the Indian entrepreneur to respond to and thrive under new situations – the diversification and growth of Indian industry after the end of License Raj in the 90s provides some indicators in this regard.

So, what will the future be under big-box retail? The truth is, that nobody has a conclusive answer and one can only make informed guesses.

The first pointer to this is the fact that retailers will tend to be concentrated around commercial hubs, leaving a greater part of provincial India untouched. Even within cities, their growth will be limited due to the several factors mentioned earlier. This implies that small traders will continue to operate even though they might need to alter their value proposition. For example, I shop branded food products at a departmental store because they offer better prices but go to the local thelawala as his vegetables are fresher. I think this pattern is likely to continue over a period of time with traditional and organized retail eventually coming to a natural equilibrium.

For the consumer, it appears to be a profitable proposition. Any sort of competition is good and as neither side is likely to have a monopoly, it can only be beneficial. Some layers of middlemen will be removed and those savings will reduce prices. Ultimately, for the consumer, it should be a matter of self-interest. Again drawing from my personal experience – though I buy vegetables from the local thelewala, there are times every year when prices of essential items (like onions) sky-rocket. On such occasions, I do switch over to the departmental store for my vegetable purchases because I get better prices even though not as fresh.

Finally, how will organized retail impact the Indian economy? We have already seen how it is unlikely to make any transformational impact on infrastructure. I think, apart from jobs generated, the biggest impact will be to regularize a significant chunk of the economy that is now unregulated. If handled properly, it will lead to higher tax revenue and better monitoring and control of a section of the economy that desperately needs structural reforms. Regularization is likely to lead to better labour practices and, in some oblique way, also impact the menace of ‘black money’. Recently, I bought a bottle of Glen from a roadside liquor shop. It cost me Rs. 5,000 and I was left with the vague suspicion of being fleeced. The next day I went to a hypermarket to verify the price and found that a similar bottle was retailing at Rs. 2,850! Though not a typical example, this still gives some indications about the level of arbitrariness and unaccounted for cash flowing in the unorganized sector. Organized retail, closely monitored by law and stringent accounting practices, can only help bring a significant proportion of the transactions in the retail sector above board.

Looking at different aspects of the FDI in retail issue, I increasingly feel that there is no need to go overboard with passion at the moment – either in support or in opposition. Behind the customary India-has-an-immense-potential stories, foreign retailers are actually skeptical about their ability to fundamentally impact the Indian market. And, with very good reasons.