Much ado about Walmart

The recent parting of ways by Walmart and Bharti has been reported in the media as the beginning of the end of FDI in retail in India, even before it could get started, as it were. FDI in the retail sector has not been forthcoming despite a hasty policy introduced late 2012. But does this mean the policy is at fault just because one of the players changed or tweaked its strategy?

There are at least half-a-dozen global players such as Metro, Tesco and Carrefour in the wholesale cash ‘n’ carry business in India — and a couple such as SPAR and Auchan in retail tradethrough the franchise route — who came much before Walmart. Many of them are operating in the wholesale cash ‘n’ carry sector with local partnerships, in keeping with the policy whichpermits only 51 per cent foreign equity. In the case of Tata Trent’s Star India Bazaar which benefits from a sourcing and tie-up arrangement with Tesco, the undeclared presence of the global supermarket is seen in product variety, imported Tesco products, the use of Tesco’s tagline — “Helping you spend less” — and the display of products.

A franchising arrangement offers the same market access to India as seen in the case of SPAR and Auchan’s arrangement with the Landmark group and, in the case of Tesco, through Star India Bazaar. Besides, it comes with much lower risk because the same is shared with the local franchisee. When this is the case, what is so sacred about owning and running stores? Even in the case of rural supermarkets such as Aadhaar, which started with COCO (company owned company operated) outlets and could not make them viable, franchising is what seems to be working.

Clearly, everything cannot be served on a platter to the foreign investor, especially as millions earn their livelihoods from retailing food products with their own or borrowed working capital. There is no doubt the traditional channels are long-winded and not farmer- or consumer-friendly, but the experience of Indian food supermarkets as well as FDI-based wholesale cash ‘n’ carry procurement so far has been no better, as they offer APMC (agricultural produce market committee) market price-based rates to farmers, buy only A grade produce, and do not give an assurance of regular purchase. All of them are into ‘contact farming’ (direct purchase), not contract farming, which does not lead to reduction in market risk to the grower.

Given the performance of domestic food supermarkets in terms of sales growth and losses during the past 3-4 years, which shows growing sales volumes but huge year-to-year and accumulated losses (though this is declining), it is not surprising that FDI players are in wait-and-watch mode. It is not only policy impediments but also the business potential of a new market and the business models that determine FDI players’ decisions.

If there was easy money to be made by investing in cold chains, directly procuring from farmers, developing new exciting retail formats and lowering consumer prices, Reliance, Birla, the Futures Group and Bharti would have already done that. Even the National Dairy Development Board’s Safal chain of stores retailing fruits and vegetables for the last 25 years has not been able to break even.

Long gestation

These business losses are not unique to India. Supermarkets in the US lose $15 billion in unsold fruits and vegetables annually, and losses are part of the business models. One in seven truckloads of perishable produce delivered to supermarkets is thrown away (14 per cent) in the US for reasons of overstocking for display, cosmetic perfection, pressure to maintain freshness, expiry dates and times, unpopular items, and low staffing. Further, supermarkets may use fresh produce for more footfalls but it is the last to yield profits; even in the case of Reliance in India, its fresh produce component, which is 40 per cent of its sales, is still growing slower than other segments.

This is not to say that modern food retail in not working in India. In cities such as Bangalore and Hyderabad, it has already reached 20-25 per cent of the total retail sales of food and is impacting traditional retail --- since in retail, each category is important, and competition is regional, not national. The contrasting examples of Gujarat, where modern retail disappeared within 2-3 years, and Karnataka, where it is vibrant and doing well, shows that India is a regionally differentiated market even for retail.

Similarly, Bharti’s presence in India with over 200 stores is indicative of modern retail’s potential. Walmart’s withdrawal from the partnership could also be seen in light of its failure to make a dent in countries such as Germany, Brazil, Korea and Japan where it could not tackle the local competition.

It is one thing to blame policy for not attracting FDI in retail trade but quite another to examine how FDI, and the policy to attract it, help the Indian economy -- other than FDI players merely exploiting a growing market? The 2012 policy has very little to offer on how the domestic economy can leverage benefits out of FDI – in terms of better markets and prices for farmers, protection of traditional retail and a smooth entry for interested players.

Problematic policy

How can the decision to allow FDI be left to state governments? This is definitely a problematic provision. Imagine the number of licences and clearances that would have to be got from each State separately! Also, given the general elections scheduled for next year, and the resistance of major opposition parties to FDI in retail policy, it is natural for any serious player to wait and watch before testing the waters.

If the market is attractive enough, FDI players will find ways of coming in, despite a poor policy. That the market is attractive is evident from the presence of domestic supermarkets and their arrangements with foreign supermarkets, though domestic players have invested inadequately for reasons of risk, their trading mindset, and fear of global supermarket takeover or sell-out plans.

No single player is that crucial to any sector or economy as is being made out. A vibrant sector needs multiple players for competition to deliver benefits to stakeholders such as farmers or consumers or small suppliers. In the UK, as the share of four major supermarkets in total retail sales grew, the farmer share in consumer price of major commodities/products bought and sold by supermarkets went down consistently.

Thus, bigger players and their dominance can be counterproductive for local stakeholders and economies. FDI is not going to solve India’s food inflation, employment or agricultural problems. If anything, the FDI players can only play a small role. The bigger role is to be played by the State and local institutions in preparing the stakeholders to face these global buyers, armed with better bargaining power and quality products.

So far as tweaking of the policy is concerned, it is desirable to include farmer co-operatives, producer companies and self-help groups under the ambit of Small and Medium Enterprises -- as small enterprises of (small) farmers --- for the 30 per cent sourcing requirement. This will help these collectives and their members get market access at better terms. Further, the entire procurement of the supermarkets should be considered for the 30 per cent condition, including fresh produce.

(The author is chairperson, Centre for Management in Agriculture (CMA), IIM-Ahmedabad.)

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