FDI and the Indian Retail Industry

Piyush Kumar Sinha, professor, Indian Institute of Management, Ahmedabad, analyses the impact of opening up foreign direct investment in the Indian retail sector.

When the decision to liberalise the Indian economy was taken in the early 1990s, many people expressed fears that  the MNCs would steamroll Indian companies. Many business experts felt that the death of Indian companies was inevitable. What happened was just the opposite. Barring a few MNCs, most of them realised that doing business in India is no ‘cakewalk’. It is a different market. It is neither Asia, read as South East Asia or China, nor is it the Middle East. The Indian market has its own ‘rules’. If today some MNCs have grown and performed well, it is almost by default - in my opinion it is  the lacklustre performance or short sightedness of Indian entrepreneurs that has contributed to their success rather than the foresight of the MNCs. The decision to allow FDI in the retail sector too has caused a lot of concenrn in the industry. However far from killing the small stores, FDI is likely to give the entire industry a boost.

“Marketing is Marketing. Anywhere”, said Prof. Michael Baker, Professor Emreritus, Strathclyde University, UK while speaking at the first International Conference on Marketing Paradigms for Emerging Markets organised by IIM-Ahmedabad  in January 2005. And he was not far from the truth. The basic tenets of marketing remain unchanged. Consumer behaviour changes and hence marketing strategies need to be adapted. This adaptation, in many cases, is carried out at the product/company level and not at the customer value level. Hence, when mobile phones are launched, they are sold for connectivity but are bought more for status. This exemplifies the disconnect between what we sell and what customers buy. The only way to remove this disconnect is to work at the customer value level. As Prof. Jagdish Sheth, Professor of Marketing, Emery University, US says: "Customers seek the four As: Acceptability, Affordability, Accessibility and Awareness. A business needs to find the right mix of these to arrive at a winning combination." On similar lines, in the business of retailing, my studies in India  have shown that customers want to optimise the value of shopping through Risk Reduction (Proximity, Quality of Merchandise, Personal Relationship), Choice Enhancement (Convenience, Availability and Spread, Format Choices) and Experience Enhancement (Ambience, Customer Service, Entertainment). Retailers try to find the right mix to suit to their markets.

Table 1: India Retail Structure

Retail Formats	2002	2003
Total Grocery Outlets	5,170,709	6,037,738
Traditional grocery outlets	4,525,264	5,273,310
Supermarkets	175	2,314
Other grocery outlets	645,270	762,114
Total Drugstores	352,786	405,743
Traditional medical/drugstores	247,582	276,058
Cosmetic stores	105,204	129,685

Source: Businessworld Marketing Whitebook 2005

This world is full of instances when world-beaters in the retailing domain have had to eat humble pie. Carrefour's exit from Japan and Mexico is just one example. In Asia only  7-11 and Tesco have tasted some success. Local retailers continue to rule the markets. The entry of large retailers in China has actually helped the growth of small retailers. This is understandable. Customers have in several studies shown that price is important but not the first reason of choosing stores. They always want a mix of benefits and would trade-off to arrive at the best store or format suited for them. It has also been seen that they buy from a variety of outlets rather than shift completely to new formats/stores. Thus, even when large stores are being set up, small stores are flourishing. There could be several reasons for this: One, a large number of brands and merchandise that are available at the large stores are also available at the smaller stores. Two, the small retailer operates at a low cost and hence can survive on lower sales volumes. Three, the customer is provided with credit, unconditional return policy, free home delivery and extended service hours. Large stores have therefore just two options: offer a price that is abysmally low and provide a better ambience to shop. Both of these add to costs and do not necessarily add to profits. Hence, unless a store is very well positioned, the chances of survival of a not so large format store is questionable. 

The retail industry in India is therefore, likely to face a polarisation effect. There would be stores that survive on high value added service. On the other hand there would be those that offer fabulous prices. Studies on the size of the firm and profitability indicate that either the small stores or the large stores are highly profitable. Those in between - the mid-sized store - are the most vulnerable. Small stores are  like grass. They survive on low resources and can grow anywhere. Also you just can’t eliminate them. They simply keep coming up. The tenacity and strength of the small Indian retailer should therefore never be undermined. In fact, new format stores must learn to co-exist. While new format stores may get some share of the revenues earned by traditional stores, they would have to find ways to survive.

Given such a scenario what are the implications of opening up foreign direct investment in the Indian retail sector. Imagine how an MNC would react to the fill rate which is almost 30 per cent lower than the current practice that they have. Where the cost of creating a parking place leads the feasibility of the store to go haywire. A flash transport strike may hold your consignment for days. In my opinion, an MNC retailer brings to India the knowledge of managing the tangibles, sourcing capabilities and possibly financial might. They would have to adapt to the values sought by customers and then wait for the Indian retailers to falter. The infrastructure, people and their culture, the behaviour and policies of trade are major dimensions where India is very different. One must also estimate the power of a retail brand as against a product brand.

FDI, thus, would only benefit Indian customers and retailers. Those who need to worry are retailers who have not got their act right, irrespective of size and the product that they deal in. This would  mean caring for customers and changing with time. A retail system that has been in practice for more than 500 years would take time to change. We must understand that retailing is very integral to the society, especially in India. Also most retailers are not dinosaur so it is unlikely that they would become extinct. The Indian retail industry has to evolve. Even when we look at the ‘developed’ economies, more than one-third of he retailers are small. The Indian retail industry is fragmented and would remain fragmented for at least the next twenty years. It is expected that by then India would be one of the leading economic superpowers and would rule the world with its own formula of retailing.


[www.icfdc.com , 6 May 2005