The Hindu Business Line : Lure of retail

That there are never any half-measures with Reliance Industries when it decides to foray into a business is now part of corporate folklore in the country. It should occasion no surprise, therefore, that the company has now announced plans of a Rs 25,000-crore push into the retail sector. But there is a broader theme that underlies the company's present plans. Indian entrepreneurs have always been fascinated by the prospect of intertwining their businesses with the lives of the ordinary consumers. Not only does it provide the ultimate de-risking strategy to their carefully crafted business models, but it also allows them the emotional satisfaction of being engaged in a purposeful venture. Old-timers at Bombay House have talked of J.R.D Tata's vision for the Tata group which would have the Tatas straddle a whole spectrum of consumer goods/services, with people living in homes built with Tata cement and lit by power (atomic, no less!) from one of their generating stations, their travelling in vehicles made by the Tatas, filling fuel at service stations that sport the Tata logo, and so on.

The era of stultifying licensing controls and import restrictions until the 1980s meant that for the vast majority of entrepreneurs such a vision remained mere wishful thinking. They had to be content with such opportunities that a whimsical bureaucracy could throw their way. The post-liberalisation growth paradigm has, of course, offered industry new choices and new opportunities but thrown up many challenges as well. Market leadership in many sectors has become highly contested. Unless enterprises are able to achieve, on a sustained basis, cost leadership that is truly international in scope, market dominance through pricing power is effectively not an option. Even then, rewards to the shareholders by way of higher returns can at best be marginal.

The reality of the mass consumption goods industry is this: With the rarest of exceptions, pricing power has been competed away in the clutter of the market-place. Businesses now reckon that only those who can build a durable last-mile connectivity with the customer can secure a satisfactory return on their investments. Such connectivity helps retailers leverage a business model that aims at scouring the entire globe for products at the cheapest prices and making them all available under one roof. This is the model that the US retail giant Wal-Mart perfected, with impressive results for its shareholders and for its promoters, who rank in the list of global billionaires. The high valuation commanded by some retail stocks in India seems to suggest an endorsement by the domestic stock market as well.