The Hindu Business Line : Your neighbourhood kirana-wala may not want you to read this

RETAILING IS one of the few sectors in India where foreign direct investment (FDI) is not currently allowed, writes L. Mansingh in his message at the start of a new book from Academic Foundation (www.academicfoundation.com), FDI in Retail Sector India, by Arpita Mukerjee and Nitisha Patel. With quick developments on the FDI front, the message may have a short shelf-life and the sector may well turn out to be the proverbial rat's tail, yet to disappear after the rodent's body has gone into the hole.

The day's news is about KPMG's report that India has emerged as the top FDI destination offering higher a return on investment (RoI) than possible in other emerging markets such as China, Brazil or Mexico.

But, first, some statistics are in order, though oft repeated. Such as that India is called `the nation of shopkeepers' with over 15 million retail outlets, contributing to the highest density on that count, while the US has only 0.9 million outlets catering to more than 13 times the total Indian retail market.

"Total procurement by global retain chains from India is estimated to be below $3 billion out of which Wal-Mart alone is procuring over $1 billion." The sector has a 6-7 per cent share in employment and 10 per cent share in GDP; and the cliché is to talk about the poor 2 per cent share of the organised sector, even as in Brazil it is 40 per cent and in China, 20.

The book is woven around a study conducted at the behest of the Department of Consumer Affairs by the Indian Council for Research on International Economic Relations. "Since data on the Indian retail sector is not available," the work has relied on about 400 responses from different retail segments.

The authors define `retailing' as all activities involved in selling goods or services directly to final consumers for their personal, non-business use via shops, markets, door-to-door selling, and mail order or over the Internet. Retailing is one of the four major services included in the `Distribution Services Sector' of the UN's CPC or Central Product Classification. The other three cover commission agency, wholesale trading, and franchising.

A new version of CPC deals with retail more extensively, in five types — non-specialised retail trade such as supermarkets and department stores where goods are displayed on racks or shelves for customers to make their own choice; specialised stores where the range is narrow and so assistance is provided to the customer by the sales staff; mail order, that accepts orders by mail, phone, e-mail and delivers products to the customers' door; non-store retail, as in the case of door-to-door sales and sales through vending machines; and retail on a fee or contract basis, where agents negotiate retail transaction for a commission.

The traditional classification in India, however, has been organised and unorganised. The authors define the former as any retail outlet chain professionally managed, with accounting transparency, quality control, supply chain management and centralised sourcing.

If that seems to be a tough set of criteria, you would be up against another difficulty too: "There has been integration of various modes of operation and it has now become difficult to distinguish between retailers, manufacturers, wholesalers, exporters and so on."

The authors speak about the global scene that has newer formats aimed at giving consumers a wide range of choice. Thus, mass merchandisers, hypermarkets, warehouse clubs, category killers, discounters, and convenience stores are all worth watching.

Retailers have also entered into newer areas such as fuel retailing, car retailing, services like laundry and photo processing, and personal financial services, write Mukerjee and Patel.

While discussing retailing in different countries, the authors write that in the US where organised retailing has an 80 per cent share of total retailing, it is only one per cent of the wholesaling companies that achieve almost half of the wholesale trade revenue.

Thailand has a tale of woe to narrate, because the entry of foreign players affected all segments — wholesalers, manufacturers, and domestic retailers — though on the positive side, the entry of foreign players encouraged the growth of the country's agro-food processing industry and enhanced the exports of Thai-made goods.

"With over 100 million consumers possessing 1,400 trillion yen worth of financial assets, Japan is one of the most attractive destinations for foreign retailers".

But China had a surprise to offer to the FDI biggies: More than 70 per cent of the world's top 50 retailers have entered China in the past 12 years, yet they occupy only 5-8 per cent of the market.

The reason? Local firms are more familiar with the market, and so the domestic sector rose by about 33 per cent year-on-year, while the foreign-funded retail outlets grew by only 21 per cent.

Laws can act as controls and barriers. For instance, Japan has the Large-Scale Retail Location Law of 2000 to regulate environmental factors such as traffic, noise, parking and garbage removal.

Malaysia's Bhumiputra clause insists that 30 per cent of equity is held by indigenous Malays and other ethnic groups; the country also bans new hypermarkets within 3.5 km of housing areas or city centres.

The Philippines mandates that at least 30 per cent of inventory, by value, be sourced from within the country; Germany's stringent labour laws affect the profitability of giants such as Wal-Mart; Amway was affected when China banned direct selling activities in 1998 to hit at pyramid schemes.

The chapter on `Survey Findings' offers many insights, such as that organised players focus on efficient supply chain and target complete saturation of the market where they are established; that contract farmers in Karnataka are guaranteed off-take from FoodWorld that offers almost 50 per cent of the price that the consumer pays, which in turn is 15-20 per cent cheaper than elsewhere; and that the distribution structure in India favours manufacturers more, and retailers less, as in the case of HLL that has a reach of more than three million outlets.

Though the survey sample is not large, the book packs in a lot of facts — be it about food imports from South-East Asia via Chennai having risen exploiting the cold storage capacity, or about Godrej's market share in refrigerators falling from 40 per cent to 15 per cent due to competition from LG and Samsung.

And there are helpful inferences too, as for instance the observation that "Indian consumers do not have specific budgets for books and music and purchases are in the nature of impulsive buying".

The authors devote a chapter to the FDI policy and entry routes where, as anti-climax, you learn that the current restriction has not acted as an entry barrier, because the `F' dots are visible in many other sectors — manufacturing, local sourcing, franchising, test marketing, wholesale cash-and-carry, distribution and so forth.

"The restriction has resulted in an uncertain regulatory environment — preventing business expansion of both domestic organised retailers and foreign retailers," opine Mukerjee and Patel.

Though the Left would trash the book for the perceptible evangelistic zeal with which the authors strongly advocate the allowing of FDI in retail, their arguments in favour make economic sense, in the interest of developing allied sectors and generating jobs, over a staggered timeframe.

A book, therefore, to hunt around for, though not at your favourite neighbourhood kirana-wala!

Economics@TheHindu.co.in

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Your neighbourhood kirana-wala may not want you to read this