FDI in Retail - Good, Bad or Ugly

In late eighties CPM vehemently opposed computerization in West Bengal. They argued that computerization will take away hundreds of jobs. The argument was partially based on ignorance and partially political. Kolkata lost the opportunity to become IT hub of India. If government of West Bengal opposes FDI in retail now, another blunder is waiting to happen and we regret for yet another lost opportunity like IT in few years time.

Let’s decode fear of FDI in retail step by step

1. Will Corner shops be closed down if retail giants enter India? So far there is no scientific or statistical evidence of this fear. Shoppers Stop, Pantaloon, West Side are operating in India almost for 10 years. Every year we are seeing more and more Malls are coming up. No corner shop ever complaint against these big retailers. Initially I used to purchase dresses for my daughter from Shopper stop or West Side. Now I go to Gariahat/Shyambazar market in Kolkata. Because I get more variety in Indian design, same quality, if not better at lower cost.
2. Corner stores support less than 200 SKUs. Multi brand retailers will support 50,000+ SKUs. So, where is the conflict? If I want to buy Corelle dinner set, I will go to Shoppers Stop.
3. If I have to buy gift for my colleague's weeding, I will prefer my local gift shop because it is cheap and convenient.
4. Multi brand retailers cannot serve 1 million people of the town. They need support from corner stores. In fact corner shops and footpath shops will proliferate in front of Malls. If you need proof, please visit City Centre, Salt Lake or Forum Mall, Kolkata.
5. Under competition corner shops also started changing their business model. They will focus more on quality and service which was missing hitherto. Corner shops in the Lake market, Kolkata started home delivery of groceries on a daily basis free of cost. They also give discount. Do you think electronic retail chain E-zone can kill hundreds of corner shops in Chandni Chawk, Kolkata?
6. Corner shops will throw stiff challenge to retailers in price war. I buy Tropicana 100% juice at MRP in Spencers whereas same juice is sold at Rs 5 less in local market.
7. Indian population is divided into multiple income groups. Every income group will find a place for shopping be it a departmental store or convenient store or corner shop or footpath shop.
8. In New York one will find all giant retailers and hundreds of corner shops along the pavement co-exist. In Gariahat area, can any big retailer or group of retailers take even 1% market share of the innumerable corner and footpath shops. Along with GKB and Himalayan Optical you will find another 10 small optical corner shops side by side. Nobody is unhappy.
9. Two things we do in the morning on a regular basis – reading newspaper (TV and Internet could not change this habit) and going to market to buy vegetables and fish. Do you think we will go to Big Bazar or Spencer or Reliance Fresh for this? We will not allow corner shops to close down. We need a Bazar within half kilometer of our house.
10. Share of organized retail in India is only 6% of total USD 470 billion retail market in India. FDI in retail will not enhance the share of organized retail overnight and disturb the equilibrium. Transition from unorganised to organised retail will be a slow process over a time of 20 years.
11. Small retailers will be immensely benefited by organized retail as they can source their products more conveniently thus reducing pilferage. There is a safeguard in the FDI policy that one third of the sales should be made to small retailers. In Kolkata BuroBazar is considered to be retail hub where one can buy quality products at a cheaper price. Corner shops all over Kolkata buy in bulk from BuroBazar. Every corner shop will welcome few more BuroBazar in different parts of Kolkata.

I cannot find single hypothetical scenario where big retailers will force corner shops or footpath shops out of business. Let’s see what the benefits of FDI in retail are.

1. More organized retail means more direct and indirect employment. Indirect employment will come in the area of security, transportation of material, back end warehouse, more cargo movement between states and countries, more BPO work through website maintenance, IT infrastructure/software maintenance and more work force in retail real estate development.
2. Currently India exports $4 billion worth of retail products. There will be a boost in retail export. In other words retail boost will push up production of manufacturing sector.
3. Since foreign retailers will use more sophisticated technology, storing of food grain which is perennial problem in India can be managed better. Perishable items can be transported from one point to another in a refrigerated vehicle.
4. India will be a retail hub for South East Asia
5. Since retailers will deal directly with farmers, they will be protected from being exploited by middle man. This is already started to happen. One example is E-Choupal program of ITC.

Finally let’s analyze pitfall of organized retail

1. Proliferation of Chinese products like US and Europe. It is difficult for unorganised retail to procure material from China or other third world countries in a cost effective manner. However there is some safeguard in the policy forcing retailers to source 30% of their product from small and medium enterprises.
2. Since organized retailers will source agricultural products directly from farmers, cost of firm products may go up that will help farmers to earn more but will put both farmers and non farmers under stress as farmers have to pay more for the product they do not produce.

In my view opposition to FDI in retail is unjust. States are empowered to put additional conditions to integrate small retailers and kirana merchants in the value chain. In fact government should allow stores to be setup to towns with population of 500,000 for better development of small towns like Durgapore. Only argument against FDI in retail is that small retailers and Kirana merchants will lose their livelihood. But there is no real data to substantiate it. Did foreign insurance companies dislodge GIC and LIC?

Finally I quote what Nandan Nilekani wrote in Sep 2005

And, who knows, like in the software, the telecom and the airline industry, the ultimate winners may not be the foreign companies but our own homegrown entrepreneurs who time and time again have shown what they can do when they have been unshackled and exposed to global competition