FDI in Retail – A Bane or A Boon?

Recently, the entire political establishment was bitterly divided on the issue of allowing greater than 50% FDI in retail. Almost 2 parliament sessions were wasted and a lot of public posturing was undertaken by leaders across the political spectrum. While supporters claimed that allowing retailers like Tesco and Wal-Mart in a bigger way can help alleviate the infrastructure problems of the country, the opposition was equally prescient in predicting the doom of local industry and commerce.

However, as is often the case with political rhetoric, both sides erred in making sweeping generalizations that have little correlation with the nuances of having big-box retail in India. Through a four-part series of articles, I will look at several aspects of this divisive debate and try to identify some of the ways that organized retail could impact the Indian market. I will focus only on grocery retail (as opposed to apparel, electronics and other non-food retail) since that is the sector which is in a more nascent stage as far as organized retail in India is concerned.

Let us first start by looking at the salient aspects of organized retail in the West.

A typical retail store in the West

A typical Wal-Mart or Tesco hypermarket can range anywhere from 50,000 to upwards of 250,000 square feet. Depending on the size of the store and the nature of products stocked, they can be intuitively classified as ‘smaller grocery stores’, ‘bigger grocery stores’ and ‘grocery & non-food stores’. Apart from these relatively bigger stores, there are others much smaller in size at 2,500 square feet.

With a limited assortment and smaller pack-sizes, these so-called ‘convenience’ stores are mostly found either in fuel kiosks or in central business districts. Convenience stores are important as they are currently driving retail growth in the West in an otherwise sluggish environment. Incidentally, these are the closest to a mom-and-pop kirana store in the scale and scope of their operations.

As is evident, these different store formats cater to different kinds of customers and different shopping needs. While some stores are ideal for the monthly ‘main-shop’, others are used for ‘top-up purchases’ and ‘on-the-go purchases’. Before 2008, customers in the West were more likely to choose a retailer based on considerations other than price – shopping experience, fair-trade policies and strength of loyalty programs being effective differentiators.

With the advent of recession, the customer today is more price-conscious than ever before and is always looking at possible avenues of cutting down on his grocery budget. They are hunting for the lowest prices, looking for bargains and switching to less expensive in-store brands.

According to data released by the online research portal Kantar, the UK grocery market is growing at 3.2% (as against a grocery inflation of 3.5%) implying that household budgets continue to remain tight with shoppers reluctant to trade-up. Consequently, organized retail in the UK and other Western markets has gone through a churn where retailers like Wal-Mart (and its subsidiaries like Asda in the UK) have comprehensively beaten the competition by playing on price. Wal-Mart, for its part, has kept prices low by procuring globally and managing costs efficiently. Thus, their ability to source and sell items in bulk remains one of the key contributors to low prices that customers have found so appealing in recent times.

It is in this climate of stunted growth in their home markets that foreign retailers are eyeing India with its ‘aspirational’ and burgeoning middle-class. However, prudence decrees that they should be cautious in their enthusiasm and alter their operating models to suit India and her unique challenges.