Foreign Direct Investment (FDI) in Indian Retail: A Necessity or Luxury?

Perhaps no policy decision has evoked so much controversy in the liberalized India as the decision by the Government of India (GoI) to allow foreign direct investment in multi-brand retail. Parliamentary uproar has forced the GoI to put the decision on hold. Along with that a whole series of measures to allow FDI in other sectors such as aviation also could be put on hold. Given that India had implemented several other economic liberalization measures without even a whimper of protest earlier, the backlash against the FDI in retail is surprising. As with any issue that is laced with emotional polemics, the issue of FDI in retail has perhaps been more of optics than analytics.

Part of the resistance could be due to the fact that the decision appeared to have been taken unilaterally by the GoI without sufficient consultations with various political parties or with the State Governments. The effort to address this shortcoming by providing a significant say to the States in the approval processes or by requiring localized purchases has failed to address the local concerns on one hand and raised doubts in the minds of foreign retail houses on the other hand. Against this background, this blog post attempts to develop an analytical framework for addressing the issues and deriving a solution.

Pros and cons

The matter of FDI in retail has evoked arguments, both for and against. The proponents believe that retailing in the overseas developed countries is characterized by robust supply chain systems and customer-centric management which require dedicated know-how. They believe that large format retailing requires huge investments which only FDI can provide. They believe also that FDI would, in fact, provide better and larger avenues to the farmers and small suppliers. And they do not believe that the corner retailers and the mom and pop stores would be snuffed out by the large retailers.

Needless to say, the antagonists of FDI cite exactly the opposite arguments. They question if retailing is such esoteric science that it would require foreign technology. They point out that many of the supply chain solutions probably have only the Indian software supporting them. They also believe that given the scale of large Indian corporations and business houses raising of funds for large format retail houses should not be an issue at all. And, the opponents are passionate in their belief that multinational retailers would squeeze out the Indian suppliers with their bargaining power while overwhelming the corner shops with their mighty stores.

Retailing, infrastructure or mindset?

Both the proponents and opponents miss the point that retailing in overseas countries has a dominant customer-centric characteristic and a unique sensory flavor that makes shopping a pleasure. At one extreme is Japan where product quality, packaging elegance and customer service make shopping a truly elegant and pleasurable event. At the other extreme is the USA where scale, scope, bundled offers and product choice make shopping a demand stimulating phenomenon. Multiple formats like Akihabara electronics district or Shinjiku shopping district in Japan, seasonal shopping in Dubai and Singapore and multi-tier stores (from COSTCO and WalMart to Sears and Target) in USA have blazed new trails in retail management. It would be great for the Indian consumer to experience all that in India.

Bringing world-class retailing experience to India is, however, not merely an issue of investments or management. It is a function of mindset change in respect of both the retailer and the consumer. The retailer needs foot-falls and purchases to sustain the investments. The consumer needs a broad shopping experience and a focused need fulfillment. Indian retailers and consumers see a conflict in that. Retailers are not able to judge if focus or breadth is the right answer. Reliance has, for example, a different shopping format/entity for each product basket (textiles, footwear, electronics etc.,) while Pantaloons and Big Bazar are the WalMarts of India offering most things under one roof.

Similarly, customers are not able to make the graduation in the shopping mindset from a functional, cheap product approach to a value-added, right-priced approach. As a result, the retail scene is marked by a co-existence of multiple shopping approaches, from stand-alone, single brand formats to all-in-one, multi-brand formats. The scene is also augmented by a trend of major manufacturers (especially in consumer electronics and white goods industries) setting up their own direct sales centers. Despite the advent of shopping mall and multiplex culture, there does not, therefore, seem to be a fundamental transformation in how products are retailed in India. To be able to achieve the transformation the behavioral dynamics of retailing and shopping need to better understood by both the retailers and consumers.

Transparency in transactions

Tracing back to the early economic theories, the modern day retailing is more than a transaction; it is one of needs and wants, matching them with products and services and providing fulfillment. A certain level of transparency is required between the retailer and the shopper to be able to make purchasing and usage judgments that are mutually beneficial, based on customer satisfaction and customer loyalty. The significant weakness in the Indian retail system relates to the inability of the customer to define what he really wants and the reluctance of the retailer to explain what he really has in terms of choice. The overseas retail houses overcome this by a combination of measures such as dedicated sale personnel, clear display of products with key product features, return and exchange programs, online shopping services, seasonal promotions and loyalty programs.

Among these, the return and exchange programs serve as a powerful tool for the retailer and the shopper to trust each other and discipline themselves to make educated selling offers and purchasing decisions. It also requires a level of trust on the part of the customer to avoid misuse of the program. India has a long way to go before such programs can take root. Typically, this requires establishment of a large format store concept to be able to manage the return and exchange logistics effectively, and in collaboration with the manufacturers. This feature is essential to keep the selling machine operating during the times when major model upgrades could occur. The willingness and the ability of Apple retail system to discount the phased out product while launching the newer generation product helped in seamless transition in the i series. Integration of the supply chain on an end-to-end basis is a key enabler for such flexibility.

Four pillars

Synthesizing the above, four pillars of modern successful retailing emerge. These are display management, supply chain management, information technology management and customer relationship management.

Display management

Display management is both a science and art. A retail house must have a clear product plan, spatial plan and layout plan to ensure that the customer is afforded accessible visual appreciation of the products with clear definition of key product characteristics and is able to exercise an informed choice. The store format of a worldclass retailing system is like planning a manufacturing or research facility, including not only shelf space but also people space, differentiated incoming and outgoing material movements and adequate parking spaces. The foreign retailing houses can be expected to think and execute big in this area.

Supply chain management

Supply chain management (SCM) is the crucial determinant of modern retail economics. Decisions on global versus local sourcing, quality assurance, inventory turnover, cost competitiveness, supply alliances, cost and price determinations, collaborative forecasting, cold chain management, track and trace systems constitute some of the critical components of SCM. The expertise of some overseas retail chains is said to be in the systemic, and often ruthless, approach to procurement which lock in capacities and deliveries to lower pricing on an upfront basis and future higher volumes on a contngent basis.

IT Management

At the core of inventory-carrying and distribution-dependent fast moving retail management lies information technology. A complex web of analytics and IT systems ensure that the inherently low margin-high volume retail business models with potentially fluctuating demand, sales and inventory requirements are assessed and provided for in the most efficient manner. Algorithms and analytical models, accentuated by good IT, help in retail efficiency.

Customer relationship management

The overseas retail experience is significantly based on enhancing customer experience and loyalty. Those who shop in Japan cannot forget the wafts of "Simasen" greetings that envelope the customers. Good retail customer relationship arises from emotional connectivity in the store through empathetic personnel, systemic connectivity through understanding purchase preferences and sharing of higher sale through loyalty programs.

Expertise and resources

The above discussion leads us to conclude that the overseas retail model succeds on systemic, technology, behavioral and investment parameters. The advantage of FDI lies in terms of ready roll-out of globally standardized proven systems and beneficial access to huge resources required to establish large format stores nationally. It is debatable if the urge for economics in this fiercely competitive industry would make the foreign chains squeeze out indigent and indigenous suppliers or would expand the markets and create more jobs. Whatever be the likely situation, world class retailing is not a rocket science which the Indian business houses and conglomerates cannot master should they put their heart to it. One would therefore be surprised by the eagerness of the established Indian retail chains to court the FDI policy in retail.

Posted by Dr CB Rao on December 14, 2011