Thursday, 12 January 2012

Organised Retail: 100% FDI - Storm in a teacup?

The issue of 100% FDI to retail chains has been simmering for quite some time now... is it a threat, or is it just a storm in a teacup? What will be the effect if allowed, and vice-versa? Will it really kill the retail trade as it exists in India? Or will it be a damb squib? There have been fears expressed on both sides of the argument. But in this article, I offer a completely contrarian viewpoint: in my view, they can co-exist in this market. It is a very dark cloud indeed that does not carry a silver lining... and the FDI factor is nowhere near being a dark cloud on the horizon of the Indian economy. Analysed dispassionately, without letting emotions cloud our views, one can spot the following factors - realities if you will - of the Indian market:

  1. LFRs - Large Format Retail chains - have been around for some time now, and have completely failed to make a dent on the retail landscape. We have already seen the advent of supermarkets, and they have yet to kill off the small retailer. What is happening is that in the vicinity of these stores, local kirana business is getting impacted by a few percentage points over the short term. Over the mid- to long- term, this can be easily overcome :
    • firstly by the attendant increase in population
    • secondly by a change in stocking patterns and
    • thirdly by an increase in personalised service
  2. Size of the Indian Market, which makes full coverage nearly impossible . India is a very distributed market, with a Kirana store every 50 yards from a residence. That coverage is going to be hard to beat, and is unmatched anywhere.
  3. The small irritants: lack of home delivery beyond 3 kilometers / minimum billing requirement; long lines at billing counters could add up to a lot, and make your regular retailer the preferred option
  4. The presence of a large number of small and local brands especially in the provisions space, which will largely be ignored by the LFR stores. This problem is exacerbated by the decision making heirarchy in organised retail, as well as by the lack of personal touch with the consumer. By contrast, for the local kirana stores, the decision maker is in constant touch with his market and is aware of local preferences and consumption trends, and is in a position to make quick decisions. This is simply because of one largely ignored psycho-sociological factor: the consumer will rarely, if ever, tell the large supermarket that he prefers such-and-such a brand. Whereas, this same consumer will be far more upfront with the local store with whom he has been conversing for years.
  5. The implication could be a change in stocking patterns at the local kirana store, with a lesser preference and focus on cosmetics and a greater emphasis on provisions. Secondly, we might also see a change in depth of stocking, with small to medium size packings being available at the kirana store, and the full cosmetic range being available at the LFR. This can already be observed in the market: the 2- and 3- Re single use pouches can be seen in local stores, but not in the major stores. As another example, in my home we purchase only a select brand of atta that is not stocked by the nearby supermarket...
  6. It would require each chain to set up something like 5 - 10 stores in just one city like Indore to properly cover the city - extrapolate this number to India, and you have a massive investment outlay... this in a crowded market, with Reliance Fresh, More, Easyday, Big Bazaar etc all already having a significant presence.  Large majority of consumers are 2-wheeled, and LFRs do not have conducive home delivery policies. This means that only people with cars can shop at these LFRs, or customers from the immediate vicinity. This significantly limits their potential area. Further, the problems in relation to provisions - demand of the local brands combined with their sourcing policies will also serve as a further deterrent.
  7. Not only that, each chain has its own in-store brands, and will thus not encourage the local brands which will be available in the local stores.
  8. The perception of supermarkets being costly will also deter a large number of consumers from tapping into these outlets
  9. The lower financial outlays of the local kirana stores will mean significant cost-savings, which can subsequently be passed on to consumers. This is already a feature in the mid-level stores- i.e. the local supermarkets like Gokul in Raipur and Prem in Indore, wherein you can already get similar or lower prices as compared to organised retail
The other perspective is the advantages that can be had from organised retail. Please note that I state organised retail and not FDI...
  1. Concentration of buying power will lead to a reduction in middle men, and a better price realisation to farmers. It might also lead to lower consumer prices
  2. The dangers of FDI / Organised retail overpowering local guys will not hold good in a market as varied and distributed as India... see coke-pepse example below for details
  3. The benefit to the supply chain side will be tremendous, since organised retail will perforce either have to invest themselves, or bring about an atmosphere that will engender investing in cold storages, for example
  4. The benefit of economies of scale will also benefit everyone in the system
The example of Coke+Pepsi has oft been quoted - the way they supposedly killed the local soft drinks market. There are, however, a couple of major differences: the carbonated soft drinks market was caractarised  by a select few competitors and brands - an oligopoly if you will. There are several competitors in the organised space already - More, Big Bazaar, Next, Easyday, Reliance Fresh to name a few. All of them are now well-entrenched and established operators. Second, only the local carbonated soft drinks market has been partially killed - Thums Up and Limca are very much alive. Further, the non-carbonated soft drinks category is still vibrant and growing with both international and local players. Third, the retail market in India is already so widespread, so ubiquitous that killing it is not possible. Take, for example, you need milk and eggs at 10 pm at night - why would you drive all the way to the supermarket when you have a kirana store available within a few hundred yards of your home?

From the above we can conclude that:
  • The higher strata of society will be tapped by the LFRs
  • There might be an initial slack in monthly sales turnover from kirana stores in the short term, especially in the vicinity of LFRs, but over the long term this will be compensated by alterations in stocking patterns, population growth, service improvements, cost advantages of the kirana setup
  • Organised retail - LFRs -are already in India in the form of the Indian chains. This is a normal development of the market - consolidation, experimentation with formats etc are normal features in a growing, developing market. The influx of Large Format Retail stores had already begun in the form of departmental stores and the local superstores. These were small shopkeepers who grew big by virtue of their business acumen. Hence, whether FDI comes in or not, Large Format Retail stores will continue to increase in number. It is only a question of a matter of time...


  1. This is too simple an assessment. 100% FDI is about allowing companies like Walmart, Carrefour, IKEA enter the country. The width and depth of their merchandise along with excellent pricing will significantly impact the current large format stores and retail customers (who will get better vareity at lower prices - when FDI is allowed in Multi-brand retail). It's like this : till we did not know about broadband internet, we were very happy with dialup connections to the web. Now,having experienced broadband internet - it is impossible to go back to the dialup system.

    1. Agreed, Bharat. I had thought of that, but the point of my article is that these guys will be impacting primarily the top end of the market. They will be competing in the same space currently occupied by the Indian LFRs. Some pain will be there- there always is pain in change. The principal impact on the kirana stores will be a percentage drop in their turnover - say 10 - 20% (based upon retail feedback), which will cause a realignment in their business model. Point 2, this is anyway going to happen as the Indian chains move up the value chain. Point 3, the Indian consumption is so varied and the market so full of local brands, that they might not find the going easy - something Kelloggs found out the hard way.

  2. Large stores do have an effect on small stores. In Bombay when Sahakari Bhandar began operations it did have an effect on small kirana shops, quite a few have vanished. When Shoppers' Stop, In-Orbit Mall and other large stores started operations small shops selling ready-made garments did feel the heat and still feel it. In such a conditions some will have to close down, those who are able to carry on do so as long as they can. Shopping experience in a mall or supermarket is a different experience, however even malls close down and are turned into office buildings. I would like a scenario where the small as well as the big guys co-exist, but it is inevitable that some will perish.

    Yes ThumsUp and Limca are alive but belong to Coca-Cola Company. Indigenous brands like Citra and Gold Spot are gone so has Canada Dry which is a MNC brand. I wonder how the local brands of soft drinks like Torino in South India and Bijoli Grill are coping up; are they around or are they gone? Can someone please tell me.

    1. There is a very material difference between Mumbai and other markets, Aroop. I have observed the exact reverse in tier-2 and tier-3 cities. The article above is based on practical observation in Indore, Raipur, Bhopal, Jabalpur, Gwalior, Ujjain, Bilaspur and a few other cities. There are 2 supermarkets near my home - Reliance Fresh and EasyDay. I have not noticed a heavy rush in those stores at any time - even between the 1st - 7th when most homes do their monthly provisioning. These 2 stores service an area that comprises at least 10,000 to 12,000 residences - at least. At no time have I noticed more than 12 shoppers in billing lines all total. I have visited all Big Bazaar outlets, more etc and the sight is the same. By contrast, my visits to Prem Cosmetics have always been stressful due to the heavy rush. Similar is the case with Gokul, Raipur. The Indian consumer is able to recognise geniune value, and will not be swayed by utlra modern amenities if it does not translate into a genuine value proposition.

      These 2 stores were your local, small kirana stores 30 years ago - and have grown into what they are over time. The Mom-and-Pop stores will face competition as a matter of course - that is unavoidable. India is a developing market, and you will always see experimentation with formats and growth of competition. India is a very different market outside Mumbai-Pune-Delhi- Kolkata-Chennai etc. That is why Malls are in deep trouble everywhere I turn- I can see empty stores, vacated stores, shops shifting out of malls into suburbs etc.

    2. Have more faith in the Indian Business Acumen, Aroop! I have seen a multitude of kirana stores who have made themselves relevant in order to compete... I have ingenuity in the Kirana Merchants, and would back them anyday! They understand the local consumers far, far, better...