FDI In Retail India

Indian Retail sector is one of the key pillars of Indian economy accounting for 22% of GDP. It was valued at $360 billion in year 2008-2009 and is projected to grow to $590 billion by 2011-2012. It is the 2^nd largest sector in terms of employment and demonstrates a promising growth rate of 14% y-o-y. In-spite of high growth rates the sector faces a number of challenges notably poor supply chain infrastructure, high amount of wastage (~35%), lack of retailing skills, higher end consumer prices, product quality etc. Therefore government’s decision to liberalize foreign direct investment in retail by allowing foreign retailers to invest 51% in multi brand format and 100% in single brand format is one of the biggest reforms since 2009. It will not only benefit end consumers in terms of providing them quality products with lower pricing but also assist growth of suppliers such as farmers, traditional mom and pop stores and other cottage industries. There are three major areas of benefits that the Indian Retail sector will get out of this decision

Ø  Improvement in Supply Chain Infrastructure

Ø  Improved retail experience for end consumers through new retail channels, speed, quality and cost of products delivered to them.

Ø  Economic Benefits such as increased employment and reduced inflation

Improvement in Supply Chain Infrastructure

Inefficiencies in Supply Chain are one of the major setbacks for Indian Retail sector. These inefficiencies spans from source to store and includes weak farming practices leading to lower produce, lack of logistics facilities such as cold storages and transportation, large number of intermediaries, poor supply chain network, improper merchandizing and in store retail practices and limited investment in technologies. Foreign retailers like Walmart, Carrefour, Tesco etc. have years of experience in achieving Supply Chain efficiencies and their investments in retail sector will most importantly improve India’s supply chain infrastructure. Some of the key initiatives they might take to improve Supply Chain are as highlighted

Ø  Contract Farming: In order to ensure high quality of products and higher productivity retailers will invest in educating farmers about best practices in crop management, choosing right inputs, achieving food safety etc. This will also remove intermediaries during the distribution process and thus will help farmers in terms of higher profitability for their produce.

Ø  Non Food Sourcing: Other non food industries will also get benefitted by reduction in number of distribution points and learnings in terms of manufacturing and packaging best practices. Large number of cottage industries who were not able to compete with large manufacturing companies will be able to sell their products through private label brands.

Ø  Logistics: Collaboration with logistics partners in developing modern warehouses, cold storage and refrigerated transportation will reduce wastage levels during the transit. Also improved supply chain network design will reduce logistics costs and improve speed to market thus ensuring higher product availability in retail stores.

Ø  Improved Retailing Format: Merchandizing and in store practices will also improve

Improved Retail Experience

Consumers will be the key winners of this decision. Organized retail will provide them with multiple product options across different channels with higher quality and lower prices. Prices for the end products will drop due to reduced wastage, reduced distribution costs and higher bargaining power of major retailers. Private labels will also get introduced, which will further bring down costs due to higher competition.

Smaller retail stores will also get benefited as they will get lower prices for the products that they will buy from cash and carry stores. They will also adopt innovative retailing practices due to increased competition, which will again benefit end consumers. Therefore it’s a win-win situation for both small retailers and end consumers.  

Economic Benefits

Government has estimated that this decision will add up to 10 million jobs in future. It will create new jobs in both front end activities such as merchandizing and point of sale and backend activities such as in store operations, logistics and administration.

Reduced pricing due to reduction in number of intermediaries, improved logistics and higher competition will also assist government in curbing inflation.

Although the future of retail looks bright due to this policy decision but there are some hurdles that retailers have to overcome before they start realizing benefits.

Ø  First of all there is dearth of skilled workforce in this sector. There is a need for investment in education and training to start developing necessary skills. Retailers may have to collaborate with local institutions to train people.

Ø  Competition from Mom and pop shops will also be a major roadblock as these stores not only offer flexibility to end consumers in terms of availability but also have the capability to alter consumer focus. Additionally they will evolve with the entry of large retailers offering better retail services to end consumers.    

Ø  Other issues related to real estate, taxation policies and credit availability may also impact development in this area.

In spite of some hurdles, which will be overcome in long term, overall Indian retail sector will get numerous benefits due to this policy decision. Major initiatives such as green revolution, economic liberalization, Information Technology Industry, telecom revolution and manufacturing have spelled the growth of India Inc. so far. Liberalization of foreign direct investment in retail is a logical next step to further enhance India’s capability as an industrial power house in global market.