The Hindu Business Line : Taking stock of retail

Mr Vivek looked at the four solemn faces opposite him. The faces showed various degrees of fear, trepidation and anticipation. Vivek was General Manager (Marketing) at Sonya Retail, an upcoming Indian retail firm.

He was recruiting for his marketing team from one of the top B-schools in India. After numerous rounds of tests and interviews, he had short-listed four students for the final round. Surabhi, Nikhil, Ravi and Swati were the candidates vying for the dream job with Sonya Retail.

“Well, all of you have done remarkably well to have reached this far in our recruitment process. Congratulations,” Vivek said, grinning at them to make them more comfortable. Four nervous faces smiled at him nervously.

Different roles

Vivek continued, “The final round will be a role-play. I want to find out how good your knowledge about the retail environment in India is. Surabhi, you will be the General Manager of Allfort Retail, a big foreign retail chain which wants to enter India in a big way. Nikhil, you will be General Manager of Sonya Retail, a big Indian player on the retail scene. Ravi, you own a kirana shop near which a big retail outlet has opened a store. And finally Swati, you are the most important of them all, the common customer.

“I want all of you to discuss the implications of FDI in retail and how it will affect each one of you. You have five minutes to formulate and organise your thoughts.”

There was a hurried scrambling, as all of them tried to write rapidly and were frowning in concentration.

The retail pie

After five minutes Swati began, “The share of organised retail in India is only about 2 per cent of the total retail market, a small fraction compared to other developing countries such as China where it is 20 per cent.”

“The country’s retail trade is expanding 22 per cent each year with the addition of 25 million middle class customers. As India’s purchasing power grows, there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop.”

Surabhi spoke next. “Big companies such as Wal-Mart, Tesco are showing great interest in India. FDI in retail is a sure shot way of increasing the share of organised retail sector. A case in point is China, where barely ten years after the introduction of FDI, the share of the organised retail market went from 10 to 20 per cent. So, we at Allfort Retail are keeping a very close watch on India.”

Predatory pricing

Ravi, who was waiting impatiently to chip in, now spoke up: “The foreign players do not have such a good reputation preceding them. Backed by their financial muscle, they first resort to predatory pricing, which our kirana stores cannot match. After they become a monopoly, they will raise the prices. Our fear is understandable. The reputation for marginalising mom-and-pop stores has often preceded big retailers.”

Nikhil spoke, “C’mon, Ravi, you are not as gullible as you say you are, kirana stores have always survived on a more personal form of business model and will always hold their place even with the entry of organised retail. They have their own USP like understanding of local needs and superior service in the form of home delivery, which will help them retain their edge over the large organised retail.

Labour displacement

“My major concern is different. The entry of big foreign retailers threatens to displace labour in the retail sector, which employs a massive workforce, the majority of which is unskilled. And Swati, the story of China is very different. There the top four retailers are domestic retailers, thanks to country’s policy of allowing domestic retailers to merge and grow in size.

“I think it is too early to allow FDI in retail. Organised retailers feel they need to be given time to gain critical mass so that they can hold their own against FDI.”

Surabhi spoke up excitedly, “But to lay the blame on the entry of foreign players is wrong. Competition for the neighbourhood kirana store could come just as easily from the Big Bazaars and Food Worlds of modern Indian retail. Its not like foreign players are totally absent in India. India has already provided ‘backdoor’ entry to international retailers. Current norms allow foreign retailers to set up shop in India via the franchisee route, and are allowed outlets if they manufacture products in India (or source their goods domestically).

“FDI is also permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for commercial purposes. Retailers, therefore, have access to the Indian market, while India loses out on the investment.”

Backward linkages

Nikhil spoke up again. He looked at his notes again and said, “The most important reason for organised retail however is backward linkages. Retailers have to invest substantially in setting up a supply chain, cold chains and training farmers to produce goods that meet quality standards. To offer inexpensive, quality products, retailers need to cut down on the number of intermediaries.

“Through contract farming, some Indian retailers have been able to ensure that farmers adhere to quality standards and eliminate middlemen. By the same token, farmers get better realisation for their produce.”

“Exactly,” piped Surabhi. “Foreign retailers would in this respect be better placed. The benefits are not limited to farmers alone. Foreign retailers would be inclined to source from the Indian market to ensure that goods reach customers on time. As they grow familiar with Indian products, they are also likely to increasingly source from India.”

“So what is the solution so that our stores don’t get threatened?” asked Ravi.

Swati said, “FDI should not happen all at once but in phases. It should be such that it encourages healthy competition for everyone.” The decision not to allow FDI should not be politically motivated. It should be a purely economic decision for the convenience of the general customer.”

“Time up,” said Mr Vivek. They all stopped talking and looked at him. “I’m really impressed guys. The points you made were very relevant and you put them across lucidly. We’ll announce the results shortly.”

At 4 pm, the placement coordinator came out of the room, with a solemn expression on his face, looking anxiously at a list in his hand. All of them were very tense. Surabhi seemed ready to cry. “Well,” he began, “I’m sorry to say it but…”, he paused, for dramatic effect…“All of you have been selected for Sonya retail... Congratulations!”

He laughed. They looked at him in disbelief and incomprehension. Then it struck them. Wild shouts of joy rent the air.

Racy@TheHindu.co.in

http://Racycases.blogspot.com

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