Thursday, December 8, 2011

FDI in Retail: As I see it

No sooner than the noise over foreign direct investment (FDI) in airlines sank, India is talking about FDI again.  This time it’s in retail. This time, however, the political noise is of higher decibel than that of FDI in airlines. And it’s not surprising because FDI in retail affects a larger base of people than FDI in airlines.

The issue has already united opposition parties cutting across political beliefs.   

And in this ideologically untenable coalition of opposition parties, there is enough to laugh over for someone looking for it. The Left parties are congratulating the Right for putting up a stout opposition to the government introducing FDI.However, the FDI decision has found endorsement from various business leaders and some major English dailies. 

But what the opponents of FDI in retail really have to say?  They say it will bring in foreign giants who will wipe out the middle man engaged in taking goods and food from the producer to the consumer. (The middle man can be a neighborhood grocer or somebody (or a group) who takes produce from the farmer to the shopkeeper.)

The anti-FDI guys also allege that the multinationals will lower their prices so much that small shopkeepers, unable to meet the price onslaught due to poor cost and infrastructure capabilities, will be eventually driven out from the retail ecosystem. 

Telegraph cited a case study to address various concerns regarding FDI in retail. The study said that a sizable group of farmers in Bengal is producing potatoes for Pepsi (Pepsi Lays) potato chips. The potatoes they grow reach Pepsi via a network of middle men. Pepsi also uses these middle men as a conduit to pay the farmers. 

And it’s working. Some farmers interviewed by the paper said the rates paid to them are much more than the usual market rates and the payments are also made in a timely manner.  

So this addresses two concerns (a) the middle man, instead of getting wiped out, is a well-established part of the business cycle; (b) the farmers are not only getting better rates than they would through the conventional supply-chain model, but they are also getting their payments in a timely manner.   

Now comes the shopkeeper. I will share my personal experience in this regard. I am currently holidaying in Calcutta. And yesterday my mother handed me a list of goods to be bought from the market. I went to a shop and did my purchase. 

But just when I was walking out, it struck me that on the other side of the road lay big departmental stores where I could have gone. But I didn’t. Not because I owe anything to the shopkeeper but because it’s a habit to visit neighborhood shops to make such purchases. And this common habit has survived the entry of big players like Reliance and Mahindra into the Indian retail space.  

And anyone who is familiar with these shopkeepers knows that they are not particularly having a great time in the current scenario: in the absence of global retail giants. 

These shopkeepers cater to two kinds of customers; those who just walk in once in a while and those who make bulk purchases from them on a weekly or monthly basis. While their business can’t subsist on the casual walk-ins, the shopkeepers retain the bulk-buying customer base by employing soft-old-world customer-retention measures like social courtesies instead of better service or pricing. Because even among small shopkeepers there is enough competition and the quality of their goods hardly varies leaving the customer almost nothing to choose from.

But as I make my case for FDI in retail, I hear the government has put the decision to introduce FDI in retail in suspension due to political opposition.

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