It took India more than six decades to become a consumption market of around $450 billion. Given the countrys stage of economic evolution,the rising incomes and the demography where young unapologetic consumers have taken charge from the bashful old guard,it is estimated that Indians will account for an additional $450 billion worth of consumption in less than a decade from now. We do not have elegant means to meet this demand, says Kishore Biyani,the doyen of organised retail in the country and also,the founder and managing director of Indias largest organised retail chain,Pantaloon India Retail Ltd. But can we create a scenario where we can provide better environment and value to all involved in the long producer-to-consumer chain? The answer is yes, says Biyani.
Pantaloon,currently,operates around 500 supermarkets and department stores across the country,under brand names such as Big Bazaar. But it has taken Biyani almost one-and-a-half decade,and a cash burn of more than $2 billion,to reach this far. Yet his empire is like a small speck on Indias large retail map comprising more than 12 million standalone retail outlets. Biyani is trying to expand his footprint but every small step comes at a huge cost reflected on his balance sheet. In the quarter ended September 2011,for instance,his profits were down 36 per cent mainly because of the huge interest he pays for loans taken to set up new stores.
Peers such as Reliance Retail and Bharti Retail,which are not listed,wouldnt divulge their financials but their story is no different. Suffice to say that we will have invested around $2.5 billion by 2015-16 to develop a retail space of around 10 million sq ft,which is like a drop in the ocean, says Rajan Bharti Mittal,vice chairman and managing director,Bharti Enterprises.
Gasping for air
At around $450 billion,retail is one of the five largest sectors of the Indian economy,contributing around 35 per cent to the GDP and directly touching the lives of people across the production-and-consumption spectrum. Organised retail is comparatively a new phenomenon which began in the eighties when India started veering towards a liberal economic regime. Bombay Dyeing,Raymond,S Kumars and Titan were among the first to make the logical progression from being manufacturers to retailers. Nineties saw the emergence of pure retailers such as Subhiksha and Shoppers Stop. In the backdrop of a fast-growing economy and rising incomes,soon a large number of new players,such as Pantaloon,set foot in the market. The non-stop action,however,has not made a significant dent in the overall retail landscape of the country. Organised retailers still account for only around 5 per cent of this market while some such as Subhiksha have disappeared on the way.
Launching organised retail formats is an extremely capital-intensive exercise. Expensive real estate and high cost of borrowing have made it even tougher for Indian retailers. Add to it poor infrastructural conditions and,most importantly,extremely scattered base of producers and manufacturers,which makes sourcing an expensive proposition.
The organised players are present mainly in categories such as clothing and accessories,electronics and appliances,furniture and furnishings and food and beverages. They have yet to acquire a meaningful presence in daily consumables segments such as fruits and vegetables and dairy products,which,according to estimates,comprise the largest chunkmore than two-thirdsof the total Indian retail basket of $450 billion. These segments are predominantly served by millions of unorganised vendors.
Besides expanding their base in the existent categories,the organised retailers are also keen to hoist their flags on this unclaimed territory. But its easier to aspire than achieve. These verticals need specialised and dedicated supply chains,logistics and inventory management that require investments running into billions of dollars, says Bhartis Mittal. A report by research agency Crisil Research pegs the investment required at $650 billion over the medium term (five to 10 years).
It is,therefore,not surprising that organised retailers are rooting for the Indian Cabinets decision to allow 51 per cent foreign direct investment in multi-brand and 100 per cent in single-brand retail outlets. FDI will help accessing cheaper funds and the technical and managerial expertise in setting up the back-end infrastructure,which is the backbone of organised retail, says K.T. Chacko,Director,Indian Institute of Foreign Trade.
The loud cheers of this group notwithstanding,there is an equally vocal section opposing the move,citing its adverse fallout on the unorganised vendors and their dependents,besides arguing that the foreign retailers would deface the cultural retail and consumption legacy of the country.
Indians may be argumentative by nature but the current debate cannot be attributed to this unique characteristic of theirs. It is an issue that has consumed a lot of lung power and mind space in other countries as well. The debate,in fact,continues even in the markets such as the US and Canada where organised retail is a well-entrenched phenomenon. Reports of excesses of big retailers such as Walmart and the environment cost of organised retailing that consumes a lot of plastic and packaging material besides using excessive electricity,air-conditioning gases and other chemicals,keep trickling in.
The nature of debate is no different in India. At present,there are hordes of research papers and data floating around that make mutually divergent arguments. Corporate consultancies and representative bodies such as Ernst & Young,KPMG,Crisil,The Boston Consulting Group (BCG) and the Confederation of Indian Industry,through various reports,argue that organising the retail activity would bring in economies of scale for retailers,and its benefits would naturally accrue to producers and consumers.
Alongside these are reports and research papers from academicians and civil society groups with arguments of their own. In a report that claims organised retail would foster inclusive growth,BCG,for instance,says organised retail would help check wastages and also get producers,such as farmers,a better price realisation,which is not possible in the current scenario because of the presence of middle men. Tracing the journey of tomatoes from farm to fork,the study says Indian farmers get only 30 per cent of what the consumer pays against 50-70 per cent that farmers in developed markets get.
Armed with another set of data,Indias indigenously evolved and world-acclaimed organised retailer,Gujarat Cooperative Milk Marketing Federation (GCMMF),argues otherwise. Data from the International Farm Comparison Network (a platform that tracks dairy chains across world markets) shows 80 per cent of the money consumers pay for buying milk flows back to dairy farmers against 30-35 per cent in the US and Europe, says RS Sodhi,managing director,GCMMF,which owns popular brands such as Amul.
Sodhi argues that big chains need to spend a lot of money on their marketing and maintaining their large undertakings and hence try to squeeze the most out of both the producers and consumers. A 2010 article in the Economic and Political Weekly by Sukhpal Singh of the Indian Institute of Management,Ahmedabad makes similar arguments. The opponents also point out that unlike the West where both farmers and manufacturers produce at a large scale and hence make it viable for organised retailers to source directly from them,in India the producers operate at a very small scale. Organised retailers are still going to need middle-men to coordinate with thousands,if not millions,producers in India, says Sodhi.
Job creation against loss of livelihoods is another point being debated. In equal terms,we employ four to five people over 700 sq ft of retail space against two employed by small retailers. Besides,we offer better work experience and decent and assured wages, says Mittal. We employ around 40,000 people directly and provide work to around 900,000 indirectly, adds Biyani. These are all newly created jobs that benefit the young workforce entering the market.
The opposing camp,however,argues that the 12 million stores operating across the country employ at least two people per shop and together feed at least a dozen off their efforts,and the big boys entering the business will cast a shadow on their lives. A 2008 report by the Indian Council for Research on International Economic Relations,in fact,showed that there was an adverse impact on turnover (declined by 14 per cent) and profit (dropped by 15 per cent) of the unorganised retail sector after the opening of organised retail outlets. It also said a majority of unorganised retailers was keen to stay in the business and compete but did not have access to institutionalised credit.
Glamour versus need
We welcome FDI in retail only to the extent that it will increase the glamour quotient of the economy. Beyond this,there is little usefulness of this step, says GCCMFs Sodhi. Amul has a world-class back-end infrastructure that processes 100 lakh litres of milk gathered from 30 lakh farmers across 15,000 villages twice a day. We didnt need any foreign capital or expertise to accomplish this. Besides,we involved the community instead of excluding it.
Biyani,however,points out that it took Amul close to four decades to make it a success. The current economic conditions call for immediate intervention, he says.
The nitty-gritty aside,the debate boils down to which route to growth India wants to take. The choice is between slow and fast growth,with pain being a constant in both. But that is a decision that India seems to have taken a long time ago,as Surjit S. Bhalla,managing director of Delhi-based think tank Oxus Research and Investments,points out. We decided to open our economy more than two decades ago. There is no point in reigniting the debate that is done and over with. Given our own and the global reality,it makes sense that India now takes the next step in the journey, he says.
Retail in India
Retail sector is the second largest employer after agriculture. As per NSSO data,in 2007-08,retail trade employed 7.2 per cent of total workers and provided job opportunities to 33.1 million persons.
Rs 1 trillion per annum is the amount lost to post-harvest losses of farm produce,especially of fruits,vegetables and other perishables. 57 per cent of this loss is due to avoidable wastage and the rest due to avoidable costs of storage and commissions,according to CRISIL Research,2007.
According to a 2008 ICRIER study on the Impact of Organised Retailing on the Unorganised Sector,the rate of closure on account of competition from organised retail was found to be 1.7 per cent per annum,much lower than the international rate of closure.
According to the same report,profit for farmers selling directly to organised retailers was about 60 per cent higher than that received from selling in the mandis.