FDI: Taking the road less travelled

If a $1.5-trillion economy growing at about 5-6 per cent annually decides to open its doors to global retailers, it is natural that the move provokes all-round excitement.

The India growth story is strong enough for them, as the demographic profile, comprising around 350 million middle class Indians assures economies of scale for these players -- the key to achieving success in a low-margin, high-volume business model.

The interest evinced by global retailers in India was also evident from a recent report released at the World Retail Congress held from September 19-21 in London. The Global Retail Index report, based on a survey of 200 CEOs and directors of global retail companies, mentioned India, along with China, as an attractive destination for global retailers.

It’s a no-brainer that established Indian players and new ones (global retailers), with deep pockets stand to gain over a period of time, subject to the biggest caveat of ceteris paribus or, “all other things remaining equal”, as economists would put it. For, things need not remain equal, given that states run by opposition parties won’t dilute their stance anytime soon, which in turn, will throw up situations that foreign players could find difficult to tackle in an industry estimated at $23 billion and expected to grow to $80 billion in the next five years.

Let’s imagine two neighbouring states, one opposed to global multi-brand retail and the other in favour. It's a confusion enough to keep new players away, but a realistic situation. Gujarat and Maharashtra, or Delhi and UP are classic examples that are bound to give logistics nightmares to those who want to leverage economies of scale. If products can be sold in Maharashtra but not in Gujarat, that would deprive retailers of a huge and lucrative neighbouring market, a proposition that any enterprise would prefer to avoid.

These ‘risk’ factors haven’t deterred supporters of the Centre’s move, who see various spinoffs once modern retail takes off in a big way. The CEO of a mall management firm managing Mantri Square mall in Bangalore says that it augurs well for both local and global retailers, the first looking at aggressive growth, and the second, for a foothold in India.

“We are extremely happy that finally India is opening FDI in retail. It will revolutionise the retail sector in India, as plenty of international players have been waiting for relaxation of rule; this will also enable many local retailers to aggressively grow their businesses. International brands were keen on exploring the Indian market which is on the growth trajectory.

This decision will also benefit the real estate sector because the demand for retail space will go up significantly in all urban centres, exposing Indian consumers to well known international brands. In a way, the consumers will have a wide range of choices before them. All these developments will have a domino effect,” says CEO of Propcare Mall Management Private Limited, Jonathan Yach.

Sounding a cautious note, a spokesperson from retail real estate asset company, Virtuous Retail, states, “While it is a progressive move and an important signal to investors, the retail FDI regime change is unlikely to have a big headline impact in the short-term, since no investor or firm invests in a single shot. The investment pace is determined by whether projects mature and companies scale up production.”

FMCG manufacturers upbeat

Manufacturers of fast moving consumer goods (FMCGs) are equally positive as the entry of global retail would open up more outlets for their products. CEO of Tata Global Beverages, a Rs 6,600-crore non-alcoholic beverages company, Harish Bhat, says, “It is a progressive step that will help retail infrastructure in India, and ultimately, customers. We have seen it happening worldwide. The Tata Group is a big player in the retail sector and hopes to benefit from the move.”

The credit card segment, which has recovered from the high delinquency rates of about 20 per cent till 2009 to about 5 per cent in subsequent years is also slated to benefit, according to CEO of SBI Cards & Payment Services Private Limited, Kadambi Narahari. “These retailers will aggregate demand at their stores where the preferred mode of payment is through cards. Once it picks up momentum, our business will witness substantial growth, which in turn will translate into benefits for customers in multiple ways. It’s a win-win situation for both,” Narahari says.

Shopping boom ahead

Real estate companies see a spurt in demand for shopping centres in the coming months. According to Executive Managing Director, South Asia, of consulting firm Cushman & Wakefield, Sanjay Dutt, “Within the next 12-24 months, international retailers will accelerate their entry strategies. As a result, the developers involved in shopping centre development, who were badly hit since 2008, will also get a tremendous boost and witness serious players expanding in this space.” He says that multiple benefits will accrue to retailers, real estate companies and consumers over the years, once the sector gains traction.

The scope for investments both on the front-end, apart from back-end infrastructure like logistics, warehousing and agricultural produce marketing, constitute a key feature, according to a PricewaterhouseCoopers (PwC) analyst. “There will be investments across the value chain that will reduce wastage by about 40 per cent. It will also result in better crop management and enable farmers to maximize their earnings,” says PwC Executive Director Akash Gupt.