Business Standard

Sunil Jain: Retail therapy

The debate has to be about making organised retail work, not the FDI levels in it

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Most assume, almost axiomatically, that organised retail chains will deal a crippling blow to kirana shops. This isn’t quite true, but even if it is, what’s not clear is how this translates into a move against allowing foreign direct investment into multi-brand retail (the has just put out a discussion paper on this, asking for responses by the end of the month). After all, if it is okay for or to finish off small kirana shops, why is it unacceptable for Wal-Mart to do the same thing?

And what kind of policy warp is it that suggests that one of the “issues for resolution”, to quote from the discussion paper, could be that at least 50 per cent of the jobs in -funded retail outlets should be reserved for rural youth — why not do the same for Pantaloon or Reliance or or More? The paper has many other such level-playing field suggestions which make you wonder whether the idea is to protect kiranas or the local organised retail firms. A priceless gem: “To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of FDI coming in (say 50 per cent) be spent towards building up of back-end infrastructure, logistics or agro processing?” Assuming this is supposed to be a profit-lowering activity, surely the same should apply to purely Indian players.

Right now, of course, the issue for organised retail, whether funded by FDI or not, is a bit different — it is of how organised retail is having a tough time getting its act together. Two years ago, the projection reported in the Icrier report on retail was that, by 2011-12, organised retail would grab a 16 per cent share of India’s total retail market — well, we’re in 2010-11, and the number is around 4 per cent!

Some part of this is undoubtedly due to the fact that the total retail market grew a lot faster than anyone anticipated since the Indian economy really took off in a big way. But the larger part has to do with the fact that organised retail has yet to find its way — after the craze to go “hyper”, retailers seemed to think the small-format was the way to go, but that hope has also been dashed with Subhiksha being wound up. You’d think that retailers would try and develop supply chains in one part of the country, or in one type of merchandise, before they moved to other areas, but this isn’t quite the thinking so far. Reliance Retail, which is now aiming at increasing sales 10 times in five years, has a bewildering range of offerings — there are “value” formats like Fresh, Mart and Super, and “speciality” formats like Digital, Trends, Wellness, Footprint, Jewels, TimeOut, AutoZone and Living, with the Reliance tag before them. Whether Reliance can pull it off or not will depend on the kind of management focus/depth it has, but it is not an easy task. It’s not just Reliance. The Aditya Birla Group, whose retail foray began when it bought South Indian chain Trinethra four years ago, has stores in Delhi and Mumbai whereas you’d think it would have remained focussed in the South and built up supply chains there — hardly surprising then that its chief executive spent the last year in closing down 100 super markets. Shoppers Stop, similarly, set up shops in Mumbai, Bangalore, Chennai and Delhi — they’re all large markets, but whether it was logical to have outlets that are so far apart is something that’s not immediately clear. Bharti, by contrast, is focussing its energies on a few cities in Punjab, getting the supply chain right there, before moving on to other cities.

The other critical problem is lack of space. Retail consultant estimates that, on an average annual retail sale of around Rs 6,000 per square foot across the country, India needs around 300 million square feet of new retail space this year alone — what is getting created, in the absence of a well-thought out and executed plan for retail, is around a fifth of this. As a result of this, and it makes the problem worse, rentals in shopping malls are sky high. Average South Delhi rentals, for instance, are Rs 400 to 500 per square foot per month — even if such shops do sales of Rs 1,000 per square foot, the rentals are crippling. Few stores can break even with rentals of more than 8-10 per cent of top line.

But even if organised retail does get its act together, with or without FDI, the kiranas-getting-crushed story looks exaggerated — and that’s not taking into account their greater flexibility, lower costs, the issue of retail space and so on. Assume, heroically, that organised retail’s share of the market will be 15 per cent in a decade — if the overall retail market grows at 9 per cent per annum, as is likely, this still means sales from kirana shops will still grow around 7-8 per cent per year in real terms. If they’re able to modernise, look at bulk buying, the government helps them get bank credit, and so on, the scenario is a lot rosier.

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