‘FDI in retail will not work out’

Rajiv Lal is the Stanley Roth, Senior Professor of Retailing at Harvard Business School. Professor Lal, currently in India to teach in an Executive Education programme run by HBS in Mumbai, has an interesting take on allowing foreign retailers into India. His research work reveals that retailers have rarely made any dent in overseas markets. Some industries don’t travel across borders as well as others, he says. The local players, the ubiquitous kirana store, will continue to dominate grocery retail, he asserts. Opponents of FDI in retail may well want to revisit their views if they look at his study. So, foreign players should look at tier-2 towns and develop the market there. Convincing their boards, of course, may be another matter. Excerpts from the interview:

Foreign retail giants have not been too successful even in their cash-and-carry businesses. What is the way out?

Three years ago I said FDI in retail will not work out. There were reasons for that and those reasons still exist. What does a foreign retailer bring to the Indian market? Indian businessmen have a better grip on the environment, the infrastructure and so on.

If you ask, what can a foreign retailer offer that Indians cannot, I am hard pressed to answer that question. However, foreign players want to be a part of the India growth story. But even on that parameter, the local businesses would give them tough competition. In the food business the economics just does not work out.

Even for Marks & Spencer it just did not work out. I went to one of their stores in Delhi and there were no customers in the store. Finally, I went and asked the store supervisor, who pays ₹4,500 for a short-sleeved shirt? He said that people bought shirts at this store only for gifting — to sons-in-law and politicians. You can see it’s a very niche market. Opening up the retail sector to FDI will not matter. Jobs will not be lost.

But the anti-WalMart lobby does not think so …

Take a look at the retail sector and the growth rate in each sector. Given the growth rate of the Indian economy, organised retail does not have the capacity to grow fast enough to really make a big dent in the smaller retail businesses. Organised retailers do not have the capacity to keep pace with the growth of the economy. What will the foreign retailer do that the kirana store cannot? Unless someone figures out a strong business case for that, there is no advantage.

This is not the case all over the world. In the US, there are very few mom-and-pop stores. In China, most of the mom-and-pop stores have evaporated. In Latin America, there is a balance of traditional and modern retail. From the evidence you see across the world, modern retail has to come together at a certain point in the economic development of a country. That affects the cost structure of the business. In India, in some ways, it’s too late. Real estate costs have gone so high that you cannot compete with the kirana store. Then there is the other part of the story. The kirana store has a competitive advantage of about 10 per cent. If you look at gross margins of 18-20 per cent, the kirana has an advantage of about 10 per cent due to lower real estate costs and lower overheads and utility costs. In other developing markets such as Brazil or Chile, the whole idea of organised retail started much earlier.

The reason for organised retail is efficiency. Efficiency in procurement and things like that. The gains from that efficiency have to be large enough to counteract the advantages that mom-and-pop stores offer, like convenience and so on.

Is expansion in tier-two cities of India the way to go?

Yes, the chances of success are higher because they are at that point in the economic development. But if a foreign retailer makes his case to the board saying, “I am going to expand in some small Indian town,” people will laugh him out. The notion that a foreign retailer will come to a second- or third-tier city even if it makes economic sense does not sit well in board rooms.

Do we see online retailers doing in India what the global brick-and-mortar retailers cannot do?

In India, the opportunity for online is huge. If you look at the Indian situation, the effort it takes to get from Point A to Point B after having spent the day at work is pretty torturous. From that standpoint, the convenience of making a purchase at home is quite compelling. Then, on the other side, you have some drawbacks as well. At least till now, some consumers are not comfortable with sharing credit card information online.

Customers are not certain that what they are buying is what they will get. If there is a mismatch, what are the consequences of that? There is an element of trust to be built up for the online space to take off.

How are brick-and-mortar retailers battling online retail giants?

It differs from category to category. In electronics, for instance, it’s a very significant problem as showrooming is a very big issue. Consumers go and visit the physical store and check out everything and get the salesperson to help. They then get a picture of the stock keeping unit (SKU) and order on Amazon at a lower price. So if you are BestBuy, then what do you do? It’s not easy to solve that problem.

You have to then look at every category and ask, what is my competitive advantage? In basic television sets, there is no competitive advantage. Then the physical store would say that if they sell as many TV sets as Amazon does, why should the pricing be any different? Then the brick-and-mortar retailer should sell its basic products on the internet and compete on price. On the other hand, if you are looking at 4K TVs that requires a lot of consumer education, then as long as the manufacturers make sure that Amazon is not undercutting on price, the physical stores should be able to make money. Or they should be able to tell manufacturers that for the display and education, they need to be compensated for the value that they provide to this brand. You have to think about what role you play, what value you add and to whom.

Because of the showrooming problem, you are no longer adding value to consumers. Or even if you are adding value, the consumer is not able to see that.

But you are certainly adding value to the brand.

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