FDI Revisited: latest research

Published December 28, 2012 by vishalvkale


Date: 25th December

It gladdens the heart to see optimism and good sense beginning to prevail over this non-issue; the latest article on this matter has yet again revisited, and added to, earlier papers on this topic, which is worth a mention.

Research on impact of retail sector regulations by the author for a CUTS international report on Competition and Regulation in India, 2011 revealed that:

(a) Globally, in densely populated countries like India (with consequent higher real estate prices), small-store formats thrive, and even flourish in the face of the competition from big-box retail;

(b) On the other hand, the introduction of foreign competition forced manufacturers to cut costs in their supply chains and small stores become more efficient, and provide more serious competition to large-store formats and centralised operation that the multinational retailers prefer;

(c) This latter trend is already becoming apparent in India, in many localities in Delhi that the study surveyed, as small store-owners are responding by upgrading to modern formats with convenient and better organised displays, ICT (information and communications technology)-enabled storage and procurement management and electronic billing counters, while building on their own areas of strength.

This is precisely what my arguments have largely been about, as presented in this blog; as well as of the entire pro-FDI community in retail; none of the above is rocket science; having said that it is important for decision-making to have a confirmed research report that corroborates intuitive analysis; analysts have been known to be wrong before! Most research was a bit dated, so it is nice to have a reconfirmation.

But the article goes beyond that; and I quote: “Though 53 cities in the country meet the population criterion, only 18 of those are in the 10 states and union territories that have agreed to permit FDI in multi-brand retail. Thus, the policy is de facto akin to a “lab experiment”. With  that, in combination with the research quoted above, comes to a close a needless argument – or, at least, it should. There will of course be political overtones and social reactions, as it is an extremely emotive topic – but that is another story.

While the article correctly touches on the rising star of online retail, it makes a link between online retail and kirana store sales. Yes, the younger generation is very adept at and comfortable with online transactions, but saying that it will impact kirana store sales seems a bit of a tall tale. I may be wrong in this; for it is too early in the day to make any comment. And this is also corroborated by the research, which comes across as a surprise. Does online retail really constitute a “more credible threat” to kirana sales?

That it is a threat in some categories – like books – is already a reality; that much is true. But does this extend to grocery? Honestly, I am inclined at this point on the reverse; that it does not – not over the short to medium term. The reason is the fast growing population, 6% internet penetration (let alone transactions penetration), low awareness & education levels, low per capita income, buying behaviour with the lady of the house preferring the physical touch and feel and sporadic, unplanned & at times impulse purchases of other categories from Kirana offtake. Perhaps, when India is a developed or middle income economy, the game may undergo a change… let us see. True, online sales are rising; but the sheer numbers of consumers in India might just ensure a safe short-to-mid term. Further, the urban and A-class consumers might shift over to retail – the threat of shift as calculated in the report can only mean that; this may happen over the mid term even. Since I accept one part of the report, I have to accept it all.

And if you look at it in this way, then it begins to click and come together, As internet penetration, awareness, usage and comfort grows in tandem with increasing income levels, the penetration of online shopping in combination with Cash On Delivery will increase. Thus richer localities will see changes; the others will only feel the same over a longer-  indeed, given the realities in India, a much longer period. What precisely will those changes be, which categories will bear the heaviest brunt, what changes occur at the store level, how our shopping experiences will be redefined all lie in the future… let us see how it turns out!

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