Sharad Pawar’s cheek has recovered, and so we can now move on to more pressing matters. A $450 billion retail market has just been opened for foreign investment.
On Thursday, the cabinet allowed 100% foreign direct investment in single brand retail, up from 51% earlier, and placed a 51% cap on multi-brand retail, having earlier allowed 100% FDI in the wholesale segment. No parliamentary approval is needed for the decision, but state governments can disallow implementation in their states.
Not surprisingly, a critical economic reform policy issue has turned into a screaming match amongst our enlightened politicians. Leaders of Tamil Nadu, Uttar Pradesh, Kerala, Orissa, and West Bengal have all publicly opposed the move, as has the BJP and the Trinamool congress. In characteristic fashion, Maywati said on Sunday that FDI was to please Rahul Gandhi – the yuvraj – and his foreign friends.
The debate thus far has focussed on the consequences of foreign investment for the kiranas, the local mom and pop shops. Opponents argue Tesco-Mart and Co and will drive the kiranas out of business and negatively influence employment; supporters argue that it will reduce prices, improve efficiency, and eventually compel the kiranas to become more competitive and improve business practices.
But have we got this all wrong? Is the kirana really the crux of the debate? What is the expected nature of the competition between mom and pop stores and the Tesco-Mart and co? Will consumers actually switch from their local store to Tesco? Which consumers?
India’s retail market is an estimated $450 billion, of which 90% are kirana stores. And, of these 8 million kiranas, about 5-6 million are in rural areas. As Tesco-Mart and Co are not permitted to set up shop in these rural areas, these kiranas are safe. So, its the rest of the urban kiranas that are supposedly threatened by foreign investment in the retail sector. But are these kiranas really under threat?
Consider the following comment in response to an article about FDI in the Guardian.
‘Corporate style retail marketing is so impersonal.There is no one to talk to and you wander all by yourself what to choose or what to discard.No shared experiences and even though there are few “supermarkets’ where I live In Bangalore I do not go there for my shopping.I prefer the small neighbourhood shops whom I know well,who talk to me,and share their views.They deliver home all we need and that by a mere call.’
Why would the consumer shift from shopping at a Kirana store to a Tesco? Service at kirana’s in unbeatable. Your local kiranawalla not only delivers groceries home, packages and puts them in your car, but also knows individual customers by face, their preferences, and actually helps them shop – mine picks the best veg for me, allows me to try the fruit, and will even take it back if Im not happy the next day. He delivers a single packet of cigarettes and a carton of milk, recognizes my voice on the phone, and will even give me groceries on credit if need be. So, why go to Tesco? The assumption underlying the current debate in political circles rests on the assumption that the consumer will actually prefer Tesco. He might not however. Cheaper prices could be one incentive. But, considering real estate prices and the space-squeeze in urban centers, these shops are likely to be in the outskirts of cities. The upper middle class is unlikely to venture far to save a few rupees. Equally, the lower middle class consumer that are struggling to make ends means, may not have the time or the inclination to make this trek. Consider also that only 1% of the country currently drives cars. If you’re going to make the trek, you probably also want to do a bout of bulk shopping. Where do the shopping bags go?
The kiranas seem safe. At least for the foreseeable future. Lets not confuse policy with politics.
The real question then seems to be whether the Indian market is large enough for the Tesco-marts?When was the last time you went to Big Bazaar, or Spencer’s? How much business do they do compared with your local? And is the market really big enough to accomodate the kiranas, the spencers, big bazaar, and the Tesco-Maarts? Big Bazaar chain of outlets has a debt of about Rs. 4,300 crore and is scrambling for ways to reduce its debt.
Tesco-Mart investment is expected to help the sector and economy more generally through the investment they will bring rural infrastructure, back-end operations, food-processing units, warehouses, and supply chains. Commentators note that this is not a problem for these retailers as they are on the hunt for higher growth in emerging markets such as India. But, the question remains, are consumer spending patterns going to change substantially enough – from the kiranas to the tesco-marts – to make india an attractive investment opportunity for foreign retailers?
I dont want to come down on one side of the FDI debate; both sides of the argument carry weight and only time will tell which side carries more weight. But, lets not confuse the issue by focussing our discussion on these kiranas. Rather than be threatened by the Tesco-Marts, they are likely to be Tesco-Marts biggest competitors.
There are more critical issues that should take center stage. Will, for example, tesco-mart be successful in improving supply chains and back end operations while facing stiff opposition from various states? How? What processes need to be put in place? How are we to ensure that they remain responsible investors, that generate employment, and invest in sustainable and efficient infrastructure?