To FDI or not to FDI in Retail is the Question

Summary:

In any issue such as FDI (Foreign Direct Investment) in Retail or in matters that concern the country and citizens, a policy should be framed with two objectives in mind:

1. Does it serve the National interest?

2. Does it serve the citizens in this case consumers?

There are bound to be impacts in between that have to be managed. This article addresses the following issues regarding FDI in multi-brand retail, namely; approval for the likes of WALMART and other multinational retail stores:

-         Consumer Benefits

-         Impact on Kirana Shops and small retailers - the “chota” capitalists

-         Employee Benefits

-         Supply Chain Issues

-         The competitive advantage

-         The darker side of FDI

-         The perils of FDI

-         Sovereignty and FDI

Consumer Benefits:

The track record has shown that the emergence of Big Bazaar, Reliance Fresh etc. resulted in FMCG (Fast Moving Consumer Goods) being sold at below MRP (Maximum Retail Price) and has forced the small retailers to adopt by providing better customer service and home delivery. It is an inarguable fact that the customer has benefited. They are voting everyday with their pockets. In India the policies tend to be supportive of the provider at the expense of the customer. The overall policy should promote customer winning and fairness to businesses, provided the National Interest is protected.

Impact on Kirana Shops and small retailers - the “chota” capitalists:

The major argument against “Big Box Outlets” and FDI in retail is the impact on the small Kirana shops. These Kirana shops are “capitalistic” ventures and it is interesting that the objections being voiced are arising from the Communists and Socialists, whose very dogma and agenda is “anti-capitalist”. Capitalist businesses thrive, survive or die based on market forces and how they adapt to it. In this matter it appears that the Left wishes to “protect” the “chota” capitalist from the “bada” capitalist even if it means at the expense of benefits to the customer.

Employee Benefits:

Kirana Shops in Urban Areas, exploit their workers, many of whom can be seen sleeping outside the shops. Big Box Retailers pay better and can be made to provide better assistance to their employees over a period of time. Policies could be enacted to have these enterprises provide housing. Big Box Retailers employ people on the floor to assist customers, janitors to keep the place clean and security staff. They provide uniforms, promote cleanliness and can be monitored to ensure better working conditions.

Supply Chain Issues:

In the case of FMCG, the direct connection between producer and seller has been effectively established by the large retailer. However when it comes to farm produce, the supply chain is mired with lack of storage facilities and the iron grip the mafia like middle men have over the farmer. The fact is that there is no money to be made in building out the required infrastructure unless the middle man is eliminated. This can only be done by enterprises that own the entire supply/distribution chain from procurement to retail/wholesale, either directly or through partnerships. Reliance Fresh has succeeded in doing this to a certain extent, and in the process faced the wrath of the goondas. eChoupal from ITC has resulted in some benefits to the farmer, but the forces against the farmer are vast and deeply entrenched. There are many parties in the supply chain starting with the buyer, the transporter, the manual labor etc. Each party protects its turf and vigourously fights anyone encroaching upon it; often with brute force. When it comes to perishable crops the farmers are always at the mercy of this mafia. What is needed is a Big Bang to shake up the vested interest.

Wheat is another story. The Food Corporation of India, buys the wheat at a premium, is unable to transport/sell all of it and as a result the loss due to rot is significant every year. Why would private parties or the farmers invest in storage facilities? It is already a losing proposition for the government and this situation has been the case for many years. With large retailers entering the wheat distribution chain, it is possible that the uptake could alleviate the surplus being wasted. If India cannot use it, rather than lose it, the wheat could be exported.

The Competitive Advantage:

The knee jerk Indian reaction is to strangle a competitor with regulatory obstacles and as mentioned earlier by resorting to goondagiri. The concept of beating the competition through “fair and square means” is an emerging attitude that has taken root in quite a few situations. China, that is revered, worshiped and looked up to by the Communist Party of India, has permitted WALMART to open stores. In response to this, a Chinese entrepreneur has opened outlets with the sole intent of beating WALMART at their own game by out-smarting, out-maneuvering, out-performing WALMART. That is what we Indians should step up to, rather than being obstructionists to progress. For instance Parle now sells packaged Potato Chips. The Indian consumer should act patriotically and choose Piknik and Parle over Kukure and Lays. Now that has a ring to it.

Indian Entrepreneurs should learn the logistic and business practices of these foreign companies and beat them at their own game. Rather than pursuing an obstructionist policy against these foreign companies, Desi companies should provide better quality products and superior customer experience at a cheaper price so that these foreign companies are compelled to down scale or shut shop and leave us.

The darker side of FDI:

The inflow of FDI is another source of enrichment for the maggots in India who wish to benefit from the flow. This is another “ATM” that the maggots will grab - ten to twenty percent or more off of the inflow. Who is to blame for this? A lot of the political opposition is for “show matey”. It will be interesting to see whether the ones who oppose Big Boxes in their State will quietly withdraw their opposition when the dust settles.

The perils of FDI:

If FDI were to come into retail and it serves as a conduit to repatriate profits khullam khulla a la the Coca Cola and IBM scenarios of the 60s and 70s, then that has to be prevented. Coca Cola imported their syrup, bottled it, sold it and repatriated all their profits. IBM imported older computers returned by their US customers and palmed them off in India. Both refused to dilute their ownership and George Fernandez did the right thing booting them out in the mid 1970s. In the case of Coca Cola, they left behind a bottling and distribution network which was quickly leveraged by Indian drinks manufacturers. With IBM leaving, other computer manufacturers ventured into the Indian market. Many years later, Ramesh Vangal, an IIT Bombay graduate, negotiated a deal with PepsiCo with a stipulation that they will export products from India to ensure a balance in Forex. Coca Cola followed suit and so did a host of other Multinationals.

Pragmatic guidelines can be laid, wherein the foreign party is allowed to repatriate 100% of their investment plus say 20% to 30%.  Beyond that they could be permitted to repatriate 20% to 30% of their profits thereafter, provided their net exports is equal or preferably greater than what they repatriate. By negotiating acceptable guidelines, a net outflow of Forex can be curtailed. 

Sovereignty and FDI:

There are allegations that FDI in India will yield significant control to vested foreign interests. This reflects poorly on India, for India is the master of its own destiny and India is fully capable of protecting her own interests even in the face of some unpatriotic maggots who wish to profit from putting their personal interests over that of the country. If it is found that foreign parties are working against India’s interest they can be booted out and their “Brick and Mortar” investments will be left behind. If the infraction is severe, their finances could be “quarantined” in India and subject to legal procedures. It is inconceivable that FDI would be a threat to Sovereignty or National Security and that drastic measures would have to be resorted to in this day and age. The goal is to accrue benefits for the investor, the country, the producer and the consumer.

The issue of percentage ownership is a red herring. Control can always be achieved through proxy ownership. As indicated earlier the important issue is of repatriation of profits and balance of Forex. The goal is to manage the money flow, ownership is a secondary issue. If ownership is a major heart burn, then ownership should be pegged at 30%. But that brings up the issue of raising the necessary capital to get this cart moving. Are Indians ready and able to pony up the required capital?

As it is Big Bazaar is over extended and hurting and other over extended enterprises (KingFisher was one, but now it is history) are probably chomping at the bits to see FDI to rescue them from their financial predicament

In Summary:

If the entry of FDI in retail does not result in a significant imbalance of India’s Forex reserves and the net effect is that both the producer and the consumer benefit by eliminating the middle man, then that it is a good thing. Change often results in winners and losers. A bridge across a river puts the boatmen that ferry people and goods out of business. In this case, the Kirana shops and small retailers will have to adapt by providing better service and delivery, in order to survive and thrive or they will die.