Reason: Why FDI in Retail is good for India


Now that the government has approved FDI in multi-brand retail, it has paved the way for the likes of Walmart and Amazon to set up shop in India. Predictably, there have been protests from shopkeepers and Bharat Bandhs from political parties.  Street vendors are saying the government is ignoring the working class, while others are worried that local industries will collapse. Meanwhile,Walmart is saying it will open stores in India within 18 months.

This shows a walmart rollback/unbeatable price...

This shows a walmart rollback/unbeatable price that is the lowest I’ve seen. It’s for folders and spiral notebooks.

I’m not so sure, though, that allowing FDI in retail is such a bad thing.  I can think of several ways it will actually help the Indian consumer :

1.  Small shops, street vendors and malls can all co-exist (as they are doing now) :  They all serve different needs, and sometimes different income segments.  Not everyone is going to be able to drive to a Walmart, or shop at malls.   The neighborhood shop selling everything from toothpaste to SIM cards is not going to go away anytime soon, whatever giant retailer comes in.  To say that Walmart will harm small vendors is like saying McDonalds will harm the roadside chaat / tea shop.

2.  Premium pricing has not meant better quality :  I have found this to be true of almost every product and service in India. Just because you go to a big store and pay a premium for a product, you cannot expect either that the product will be better quality, or that the service will be better.  Prices for a whole lot of products are the same as in the US, though the quality is just not the same.

When I visit India, I buy kurtis and bags from street vendors for Rs 100 or so.  I also buy kurtis from big-name stores in malls, and from Fabindia for anywhere from Rs 400 to Rs 1000.  At the end of the day, I don’t find much difference between the Rs 100 kurti and the Rs 500 one.  Both are cotton, both run during the initial few washes, and both last equally long.

convenience of buying everything under one roof

3.  Customer service is non-existent :  Most stores in India will not allow a customer to return a product even if he/she has the purchase receipt and the product is unused.  Salesmen are more inclined to hardsell a product than understand the customer’s needs and steer her to what will fit her needs. And if you get a lemon, getting the store or the manufacturer to fix anything is extremely time-consuming.   I have been surprised that the same big name brands who provide excellent customer service in the US do not do so in India, not even in their company-owned stores.  If  the advent of FDI means stores with US standards of customer service, it would be a big improvement.

4.  Local industry doesn’t have to suffer :  A lot of stuff will still be made in India.  If people want to use Hamam soap and Bambino vermicelli, that is what Walmart will have to stock.  Even where there is no brand preference, it makes complete sense to source items locally instead of importing them from say, Mexico.  It’s not as if products made in China are not already sold in  Indian stores, small and large.  That is the greater threat to Indian industry, not Walmart.  Granted, Walmart has a long history of squeezing its suppliers (and will do the same to any Indian suppliers), but the suppliers who stick with Walmart do so because what they lose in margins per unit, they make up with the huge volumes.

Finally, the FDI approval does state that “ 30 per cent of the products must be procured from small scale industries which have a total investment in plant and machinery not exceeding $1 million. ”

This is a selfmade image from the english wiki...

The Walmart store

5. Hypermarkets aren’t new to India, right ?  We already have the Big Bazaars, Spencer’s and Spencer’s Hyper, Reliance Mart, Star India Bazaar, Bharti Easy Day Hyper, Hyper City and Spar so on.  So what are these international chains going to do that’s so dangerous for local industry? If anything, the consumer will have greater choice.

6. Some categories currently have no big players :  There are some categories of stores that are just not present in India.  For instance, we have the friendly neighborhood hardware stores, but something like Home Depot could really change people’s attitudes towards DIY.  (At first, though, people will just buy tools so their handyman/carpenter has what is needed.  A bit like how washing machines mainly make the maid’s work easier.)

Similarly, craft shops like Joann could potentially do well in India given how many people still sew/ embroider/ knit etc.  Knowing India, it could well also be a go-to store for tailors and owners of clothing boutiques.

7.  The Prime Minister’s perishables argument is very true : We do have enormous wastage in foods and vegetables because small stores and vegetable vendors cannot afford refrigerated trucks, or actually any refrigeration.  The stores lose money, and so does the consumer (because a lot of the fruits/ vegetables spoil too quickly after purchase).

Having said all this, a Walmart , Target or  Home Depot will only do well in India if it adapts quickly to the Indian market, otherwise it could very well fail spectacularly.  So it should be very interesting to see how this all plays out over the next few months.

Scenario 2: What’s on after the approvals of FDI in India

“Every retailer in the market is revisiting their strategies. A new ecosystem, wherein the acceptance of modern retail is growing, accommodates hypermarket stores better.”

Existing retailers are now plugging into the hypermarket opportunity. In India, any retail store occupying over 50,000 sq. ft. space is termed a hypermarket. For a retailer, any metrics in a large format store automatically translates to more profits. Such stores are more efficient because of scale and area.”

Too much spaces

Too much spaces

Industry reports say that while hypermarkets in India have grown from 116 in 2008 to 307 in 2012, supermarket and smaller format stores have actually come down by 604 outlets in the same period.

Data taken from Hindustan Times

“The notion that large format stores take more time to break even is a myth. At an operational level, most professionally run, big group stores break even from two months onwards,” that is why Spencer’s is looking at adding six-seven hypermarket stores every year. Each such store takes Rs. 4-4.5 crore investment to set up.

“There is a trend where consumers prefer the hypermarket because of a combination of best prices and destination shopping,”

The gestation period for large hypermarket stores is anywhere between 3-5 years. Compared to a supermarket store, the average billing at a hypermarket store is usually five times higher. Modern retailers, who have played with various formats and at times burnt their fingers, are beginning to look more keenly at the hypermarket opportunity and the next wave of expansion, say experts, will see a growth in hypermarket stores in India.

A Shanepedia Compilation

A Shanepedia Compilation

Along with thanks and compliments to the sources for the shared data

Creative Commons Copyright© Shanepedia 2012


2 responses »

  1. nisi says:

    Nice to understand the issue in simple way


  2. anandkumarrs says:

    Good post ! While on this please read my post on FDI –
    Feedback and Comments welcome !


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