Despite the fears over FDI in retail sector, the presence of both Indian and foreign companies in this sector have shown that collaborations/partnerships and mergers and acquisitions can lead to a win-win situation. This will help consolidate the retail and wholesale business and facilitate economies of scale. The likely acquisition of the wholesale cash and carry business of Germany Metro AG by Reliance Retail is one such example, which can benefit both partners.
As per the media reports, Reliance Retail is all set to buy the India operation of the German-based Metro AG’s Cash and Carry in the range of ₹4,000-4,600 crore. This acquisition will help Reliance Retail to strengthen the B2B segment, develop strong backward linkages and access the robust supply chain, which Metro AG’s Cash and Carry has set up over the years, bringing in its European experiences and global best practices.
Metro AG’s Cash and Carry entered India in 2003. After stiff opposition initially against FDI, Metro has successfully developed strong partnerships and efficient supply chains in India, which has helped to improve farmers’ earnings and reduce wastages. While many players have struggled in the Indian wholesale space and have been unable to decipher the code, Metro’s Indian management — with its strong understanding of complexities of the Indian market and establish a profitable B2B business — managed to break the jinx.
Metro’s wholesale and Reliance’s retail operations are complementary. Reliance will benefit from the presence of 31 Metro wholesale stores Uttar Pradesh, Karnataka, Telangana, Gujarat and Maharashtra. These stores have been serving a large number of customers especially small and mid-sized retailers, kiranas, hotels, small restaurants, industry complainer and institutions.
In the Metro supply chain, farmers and MSME suppliers have become cognisant of quality standards and are guaranteed a certain price. Metro, over the years, has built in considerable trust and partnership with stakeholders, which has enabled it to become profitable in the last five years.
The parent company in Germany did not have to invest into Indian business after the initial investment of $250 million, as it has been self-sustaining. Thus, Reliance will have access to a profitable venture which will allow it to scale up operations.
While the withdrawal of Metro AG’s Cash and Carry from many countries, including India, may be a cause for concern, especially for its employees; the news of its likely acquisition by Reliance, may come as a breather for them. Reliance which has been on an acquisition spree for its retail business, is known to maintain the status quo and retain talent. As India sets to negotiate trade agreements with the EU and the UK, the discussions on the impact of allowing FDI in retail and wholesale trade is again under debate.
This example of Metro Cash and Carry and its likely acquisition by Reliance Retail shows that FDI is not harmful. FDI has helped to develop a modern retail and wholesale business and Indian companies are ready for acquisition of global firms. Such acquisition will help the domestic players have efficient supply chains and trusted business partners. This will also enable them to play a bigger role in global value chains.
The writer is Professor, ICRIER. Views expressed are personal