Business at Oxford | Organizing a retail makeover

Business at Oxford | Organizing a retail makeover
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First Published: Mon, Jun 11 2007. 01 32 AM IST
Updated: Mon, Jun 11 2007. 01 32 AM IST
A recent study of India’s consumer market, undertaken by the McKinsey Global Institute, suggested that by 2025, it would be the fifth biggest in the world (from 12th position today). The number of middle class consumers will multiply tenfold to more than half a billion. The 23 million wealthiest citizens will outnumber the entire population of Australia. This rhetoric is familiar and the journey, an understandably exciting one, but one during the course of which a number of enabling economic and social transformations must occur. Among the most significant of these is the transformation of retailing.
A modernized retail sector is a prerequisite to successful consumer- market growth. Large-scale organized retailing provides extended and abundant choice for consumers and a reliable and consistent supply of products at keen prices, because of the buying power such companies are able to command. The product choices made by retailers and the showcases they offer them also constitute drivers of social change by inspiring and educating increasingly aspirational consumers. As a ‘gatekeeper’ employer and a purchaser of goods and business services in its own right, a modernized sector can make a much broader contribution to economic growth and social stability. At present, despite being the largest and most fragmented employer after agriculture, India’s retail sector remains one of the least organized in the world in terms of market size. As much as 96% of the country’s 12 million stores are less than 500 sq. ft in size and the top five retailers account for less than 2% of the modern retail market. The question about retail modernization is, however, how to go about it. And, how to go about it in a way which balances economic and social welfare goals.
These are not simple questions and have preoccupied politicians, investors and—not least—the mom-and-pop shop owners and their representatives, who feel their livelihoods are at risk. One way to do it is, of course, to invite firms from developed markets to extend their capabilities and expertise into the Indian market. Currently, foreign direct investment (FDI) of up to 51% is allowed in single-brand retailing, whereas multi-brand retailing is not open to foreign participation. An industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci), has again called for liberalization of the FDI regime, arguing that the sector will not be able to grow to its full potential without full international investment and support— so far, to no avail.
Western retail firms agree with Ficci. Speaking at the World Retail Congress in Barcelona in March 2007, Sir Terry Leahey of the UK’s Tesco expressed his frustration: “Around the world, there is still often an instinct for governments to defend entrenched interests rather than to allow new market entrants to compete fairly. ‘Economic patriotism’ is just a fancy way of saying ‘protectionism’—and protectionism is always bad for consumers.”
What are the alternatives? It is tempting to look inwards for salvation and rely upon domestic resources alone to transform the sector. Substantial investments are indeed being made by industrial combines with interests in the retail sector. Reliance Industries is investing $5.6 billion (Rs22,960 crore) over the next five years through its newly created Reliance Retail subsidiary. Much of this investment will be in supply chain and infrastructure, and the company will roll out more than 1,000 Reliance Fresh food stores in 35 cities by the end of 2007 alone, alongside speciality stores and hypermarkets. But Ficci estimates that more than $30 billion investment is required by 2011 to create a strong domestic sector. Where will this come from?
The present state of affairs in India sees a hybrid route developing, as a consequence of the current regulatory regime, in the form of back-end partnerships between Indian businesses and foreign firms. Is this the best of both worlds? Perhaps. Bharti Enterprises’ association with Wal-Mart Stores Inc., it is claimed, will lead to some goods being 25% cheaper than other wholesalers. Keeping foreign retailers at arm’s length in this way may seem attractive, but such partnerships have their weaknesses, too. Much courtship is in evidence, but there are also plenty of jilted suitors around. Even when an apparently appropriate partnership has been struck, foreign retailers can ideally look to local partners for their in-depth knowledge, but may be less willing to commit the skills, resources and expertise to develop efficient and effective value propositions which are not wholly owned. For example, it is rumoured that Wal-Mart will receive fees for the advice it gives Bharti on store operations. Inevitably, while this is a less satisfactory entry route for foreign retailers, it is also a lower risk one. We also have to ask about the transition of this model should FDI be relaxed.
Am I treating FDI liberalization as inevitable—even if the timing is difficult to forecast? Perhaps I am. But the focus on liberalization neglects other, less controversial, measures which could be taken and might provide an early and strong basis to modernize the sector. Classifying retailing as an industry would allow access to financial and investment incentives. Tax reform would facilitate cross-state flows of products and tax holidays promote the development of necessary infrastructure. The dire shortage of talent is affecting all those seeking to modernize. Promotion of, and support for, retail training programmes at all levels would be a prerequisite for the development of the sector.
And, finally, there is so much to play for. Interviewed at the World Retail Congress earlier this year, Reliance Retail president Bijou Kurien was asked about the prospects for the Indian market and the threat posed by foreign entrants. He was upbeat in his response. “The more the players, the faster the growth of organized retailing,” he observed, a view confirmed by Ficci secretary general Amit Mitra: Retail modernization in India is a “win-win possibility”.
Jonathan Reynolds is the director of the Oxford Institute of Retail Management at the Saïd Business School, University of Oxford, UK.
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First Published: Mon, Jun 11 2007. 01 32 AM IST