Foreign direct investment (FDI) in multibrand retail is neither the manna from heaven that its proponents claimed it would be, nor is it the evil its opponents have named it. Everyone forgets that this is an industry which is not making money. It is no different from airlines or television news channels that, as the joke goes, transform billionaires into millionaires. Whatever domestic investment still occurring in the sector is largely because of hope hinged on valuation.

Unarguably, in the long run, FDI in retail will be good for India, but in the short and medium terms the picture is fuzzy. Today, organised retail in India is 5% to 6% of total retail, plus about 12 million kirana shops. The latter still serve much of India, thanks to three factors. First, they offer the convenience of location, since they are omnipresent. Second, most offer home-delivery services. Third, they often offer purchases on credit to customers who lack conventional credit. Most modern retailers do not offer these options. While consumer demand, the primary driver of modern retail, has expanded consumption choices perhaps 20 times in the last 20 years, it has not changed dramatically enough to woo the megabucks of FDI in retail.

Furthermore, India’s ecosystem is unique. Globally, real estate costs account for about 2% of revenue. In India it is 5% to 6%. Utility costs are 1% abroad vs. 3% in India, and manpower is 2% vs. India’s 5%. Thus, the weighted average gross margins at the store level, globally 15% to 18%, are about 10% after accounting for a higher cost structure. In addition, with maximum retail prices fixed by law, the retailer cannot price items differently at premium and non-premium locations. Consumer footfalls are low and average spend is about Rs 1,200 to Rs 1,500 per visit, making most of the industry bleed. No wonder Reliance Fresh, Easyday, Spencer’s, More, and Big Bazaar are all in the red or bleeding badly. More has shut down almost all its stores in Maharashtra and Punjab, Subhiksha has shut shop, and my prediction is that most of the 2,000 sq. ft. to 3,000 sq. ft. stores will shut down in the next year or two. Hypermarts and large format stores will be the ones to survive.

Amul, which produces 110 lakh litres of milk every day, gives its distributors 3% to 5% while retailers get 8% to 10%. So, the entire supply chain offers only 11% to 15% margin against the 30% margin that large format retail in the West is used to. Thus, I’m not one of those who believe that the Walmarts of the world are straining to rush to India, given all the above.

No doubt, modern retail will organise the industry, improve skills, raise productivity—a McKinsey study argues that almost a fourth of America’s productivity was due to investments in retail—and be good for the economy in the long run.

Technology investment powers modern foreign retail, which in turn increases productivity. David Glass, who transformed Walmart, used barcodes and Retail Link, software that tracks sales of specific items on specific weeks, specific days, or specific hours of the day, when the most merchandise is sold. It also enables Walmart to slash both prices and costs, using its power as a monopsonistic buyer, which may not be always good for the farmer or supplier. Nor for its employees, many of whom are paid just about minimum wage.

To believe FDI will bring investment into cold chains is highly unlikely. The supply chain will only develop when there is demand and a significant change in lifestyle and habits, requiring frozen food to become a staple part of the Indian diet, which is unlikely in the short run. Little wonder then, despite FDI in warehousing, and cold chains being allowed since 1996, the investment in it is negligible.

While India’s mandis are antediluvian and need comprehensive reform, big retail will invariably appoint its own versions of middlemen or “aggregators”, or rely on the larger farmer to procure from the smaller farmer. Given that the average landholding in India is 0.5 acres to 0.7 acres, there is no way they can procure directly from each farm.

In sum, the jury is still out on the impact of FDI in retail in India. Global evidence is mixed, so the best that proponents and opponents can do is to hold their horses and not decide based on emotions or slogans; instead garner and analyse facts, which often tell a different story.

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