Demystifying FDI

All the major retailers be it Pantaloon , RPG ,Reliance or Bharti . All are shouting from the top of their retail roofs about their demand that India needs to become more liberal and allow Foreign Direct Investment ( FDI ) in retail

Let’s study where retail is,  and why do we need FDI ?

A lot of people jumped into retail around 2000 including Pantaloons, Subhiksha , Vishal , Adani group etc . A few years later, excited by the ‘unsubstantiated reports’ from the top consulting firms about the fantastic retail sector  , every major corporate houses like RPG, TATA , Birla’s and Reliance also joined the bandwagon. It lead to competitive retail . All Retailers were vying for the same space , same people & same vendors for a much higher price . Marketing costs increased but margins decreased .

Finally , everyone in retail burned their fingers and lost hundreds of Crores . A few merged or died a natural death !!

I have written earlier ( in 2007 ) in my column that retail in the current form and format was unviable . We see that , when we look at the closures of stores at all major retailers. I think that the way forward is clear , either you have to get into Hypermarkets or small ( Kirana ) format . There is no place for medium ( so called super market ) retail format . I see that the Indian customer’s fondness for variety and prices coupled with the entertainment options within the retail super space !! No other format except Hypermarket will succeed

Back to my main topic why do we need FDI :

What do retailers need to succeed ?

  • Technical knowhow – This can be had by hiring experienced people from abroad who are happily willing to come and work in India or through the franchising route
  • Vendor or sourcing arrangements – can be done via franchising tie ups
  • Merchandising mix– Actually , this is the least of problems as one can go around and see what all is visible and can be copied
  • Brand value – Franchising tie ups can bring brands like Wal-mart etc
  • Training the retail staff – Can be locally developed in collaboration with international tie ups
  • Money to grow – Here is where the answer lies – Retailers in India are loss making and even if a few who are reporting profits , they have uncertainty over the consistent growth  and profits . Retailers know that, they need to make the best of the opportunity with major foreign retailers entering India. Whenever FDI is allowed , it is a foregone conclusion that major foreign retailers  would either pick up a stake or buy the local retailers out at ‘Decent valuations’ and the promoters will cash out with big bucks .

I do not understand if the retailers are successful , why should they have problems with raising money locally ? Any investor would be keen to invest in a profitable venture or the money can be raised from the stock markets .Rest all can be had as mentioned above via tie up or recruitment of experienced people from abroad

PE / VC’s do not invest in retail as it is not profitable and the successful model is still to be seen. Government must be firm that it will not allow FDI in retail , as it will definitely kill smaller retailers . Government should evaluate what the retailers need and understand their reasons for asking FDI to open in retail sector ?  These ‘failed retailers’ will cash on and exit and the Indian retail scene  with the opening of the  FDI . Indian retail sector will get dominated by biggies in retail like Wal-mart or Carrefour or Tesco’s of the world . I see more deaths in retail in the times ahead.  Indian  retailers have still not figured out a successful retail format and that is the challenge,  and FDI in retail does not have an answer .  Indian government should only allow franchising in retail and nothing else. If retailers want to raise money they must either raise it privately or through the stock market

If we allow FDI in retail at this point , it will be like creating another East India company and India will lose heavily

Rajendra Pratap Gupta


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