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FDI in Retail: A Game Changer

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Reporter's-diary2012 – One more year of policy paralyses, a slew of corruption scandals and lackadaisical governance. Another year of lost opportunities and the yawning disconnect between the government’s actions (read inactions) and the ‘aam aadmi’s’ woes becoming even starker.

As tempted as I might be to continue my tirade against the government, the optimist in me is going to talk about the one reform initiative, which, in my opinion, has been the only saving grace to an otherwise disappointing year. The innovative marketing gimmicks that we saw being used in the recently concluded Gujarat elections is another positive that has redefined the way political marketing and advertising is done in India. But let’s save that discussion for some other time.

After endless political tussle, Parliament gridlock and those fiery, often amusing debates about potatoes and fries, FDI in multi-brand retail trade bill was finally passed. What does this mean for the various stakeholders – the global players, who till now were entering India through the licensee/franchisee route, the vast unorganised retail sector, traditional kirana stores and small retailers, Indian farmers and rural producers, and finally the consumer? What is the likely impact, from a marketing standpoint?

Easing entry norms for foreign players will intensify competition in the domestic market, thereby creating a multiplier effect. Threat from globally established retail giants will induce domestic players to introduce product innovations, improve the quality of products and speed up the emergence of product standards (especially in perishables and personal consumables). This means enhanced choice and improved quality for consumers and given the rising disposable incomes and purchasing power of Indians, will translate into increased spending.

Heightened competition will also drive prices down. International firms need to localize not just their product portfolio but also their pricing strategy as per the demographics of the particular country they operate in. For instance, Starbucks, the US based coffee chain that entered India earlier this year in a JV with the Tata Group, opted for a low-pricing strategy in India – with prices lower than what the coffee chain charges elsewhere in the world.

One of the core arguments against FDI in retail has been that the mom-and-pop stores will struggle to survive amidst these big-box stores as global chains will collude and exercise their monopolistic power to lower prices and drive smaller retailers out of business. However, in my opinion, this is a simplistic assumption. Local kirana stores have low prices since they do not have too many overhead costs; investments in the store are bare minimum and so is the cost of labour employed. Will Walmart or Tesco be able to bring down prices to such an extent, keeping in mind its investments and capital employed?

There are severe supply chain constraints in India, especially in food-related retail chains, which limit the easy availability of products across geographies. There is lack of basic infrastructure like refrigeration and warehousing- which increases spoilage and the time taken by the finished product to enter the market. When Dunkin Donuts entered India earlier this year, one of the foremost advantages that the international doughnut chain had over domestic players was its back end infrastructure and supply chain.

Foreign firms will bring in investment into the development of the complete backend infrastructure like cold chain and supply chain and thereby increase efficiency from farm to fork. This will help to curb the exploitation of the farmer by the middleman, who often takes away the lion’s share of the profit. Opening up of the retail sector will create an organized supply chain and will benefit the farmers.

While it remains to be seen which states finally give a go-ahead and allow FDI to come in, greater investment, entry of established global players and their resultant effect on the domestic retail landscape, and removal of existing inadequacies will have a profound impact on the current set-up. Though the benefits of this move will be accrued only in the long run, opening up the retail sector to foreign direct investment will undoubtedly reshape the country’s retail landscape.

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