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| Should small-scale sourcing be compulsory for single-brand retailers? |
| Business Standard / New Delhi Jan 25, 2012, 00:21 IST |
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The policy is unworkable given global retail dynamics but SMEs need access to markets and opportunities too.
 Saloni Nangia
President, Technopak
“It takes brands years to develop manufacturing and sourcing capability, and once it is in place, this supply chain is very closely integrated with the overall business. Finally, these supply chains are almost invariably global”
The recent note from the Department of Industrial Policy and Promotion on the so-called opening up of foreign direct investment (FDI) in single-brand retail to the extent of 100 per cent is yet one more instance of the highly muddled thinking of the governments at the Centre in the last 12 years. This is best reflected in the imposition of the condition that requires such single-brand retailers, if they were to hold more than 51 per cent equity in their India operations, to source at least 30 per cent of the value of goods sold in India from Indian small-scale manufacturers and/or village and cottage industries, artisans and craftsmen. Indeed, the impracticality of implementing this condition also clearly demonstrates a near total lack of understanding by the government and its babus of the dynamics of the retail business and especially that of the so-called single-brand retail.
Single-brand retailers cover a very wide spectrum of consumer goods and equally wide strata of consumers. Some of the most prominent single-brand retailers addressing the mass market include Aldi of Germany, and some brands of Spanish retail group Inditex such as Bershka. At the mid-end, some of the prominent names include Marks & Spencer of the UK, H&M of Sweden, Gap of the US and Uniqlo of Japan. At the relatively upper-end position, one of the most prominent names is Apple and then premium clothing, footwear and accessories brands such as Abercrombie & Fitch, Coach and so on. Then, at the very top, are luxury brands such as those belonging to the stables of the LVMH and Richemont groups.
These are all businesses that have succeeded in offering and living up to a very distinct, strong brand promise – consistent and uniform product, right quality, and consistent brand experience – across all their stores worldwide. This has been achieved through a very strong process orientation and total control across all aspects of the business — store design, all operating processes and most importantly in the manufacturing and/or sourcing of their merchandise. Although retailers do sometimes franchise front-end retail operations under their strict supervision, production/sourcing remains a centralised function, completely in control of the international brand. It takes them years to develop this manufacturing and sourcing capability, and once it is in place, this supply chain is very closely integrated with the overall business. Finally, these supply chains are no longer local or regional, and are almost invariably global.
Anyone having even a very elementary understanding of this business dynamic would see the infeasibility for Apple, IKEA, Aldi, Uniqlo, H&M, M&S, or even Gap to meet the government’s condition on mandatory 30 per cent sourcing from small-scale (and cottage industry) vendors. The irony is that even if some of the single brands make some effort to develop such vendors, if they are successful, it would not be long before these manufacturers become big enough to be de-classified as “small-scale” and the process of developing new vendors will have begin again. Imagine asking an automobile company such as Suzuki or Tata Motors to develop new vendors continuously as their own business grows in volume!
Therefore, if the Indian government is serious about attracting FDI in the retail sector, and not subject itself to even more ridicule, it should put in more serious effort and thought in understanding the retail business, its dynamics and its operating ecosystem, and then develop a framework that is practical and positive for all the stakeholders — the Indian consumer, the manufacturers and suppliers and the Indian and international retailers. Recent news reports mention about IKEA giving up on India for the time being. If such a ridiculous policy framework remains in place, they would not be the only ones to do so!
 R V Kanoria
President, Ficci
“Having a global retail leader fronting for you evens out the biggest problem SMEs face — the huge difference in size and scale, and consequently, bargaining power, between suppliers and buyers
The Federation of Indian Chambers of Commerce and Industry (Ficci) strongly supports the government’s much-awaited policy move of permitting 100 per cent foreign direct investment (FDI) in single-brand retail, up from 51 per cent. It also appreciates the government’s initiative of promoting Indian small and medium enterprises (SMEs) by encouraging a certain percentage of product sourcing from them by foreign retailers.
This clause is a positive and constructive step that will boost domestic manufacturing and will provide SMEs better opportunities and market to sell their products. It will also provide access to international markets. Ficci is also hopeful that large foreign retailers will turn to SMEs for manufacturing “home brands” so that with the expansion in their production capacities, more employment opportunities will be created.
Further, large multinationals have abundant resources, in-depth knowledge of various markets and also the bandwidth to mentor Indian SMEs. Also, having a global retail leader fronting for you evens out the biggest problem SMEs face while pitching for business — the huge difference in size and scale, and consequently, bargaining power, between suppliers and buyers.
Having said this, due attention must be paid to the current state of Indian SMEs. The biggest bottleneck for the sector is inadequacies in scale, capital, technology, quality and innovation. The availability and cost of finance is another big challenge. There are certain categories of products in which Indian SMEs have not been able to build a foothold for lack of expertise and resources. In these products, Indian SMEs face capacity constraints and lack of manufacturing capabilities to supply the growing demand from foreign retailers. Thus, global brands may find it unviable to comply with the 30 per cent sourcing clause. The condition will pose a hurdle for those wanting to enter the India market on their own, without a local partner. The 30 per cent sourcing clause kicks in once the 51 per cent FDI limit is exceeded. If this were to happen it would negate the basic intent of the policy — of increasing FDI flows!
We also need to understand business realities from a retailer’s perspective. Retailing in itself is a low margin business with long gestation period, so we need to give due consideration to the viability of operations. Moreover, foreign retailers lay emphasis on high quality standards. With the mandate of compulsory sourcing from SMEs, foreign retailers may find it difficult to source products that meet their requirements. It is, therefore, important that policy conditions be so framed that they meet the twin objective of promoting and safeguarding Indian SMEs and maintaining the attractiveness of India as an investment destination.
It is, therefore, required that a graded approach be used while conditioning the sourcing from Indian SMEs by foreign retailers.
A possible solution could be to start with an initial 10 per cent compulsory sourcing by foreign retailers from Indian SMEs and increase this to 30 per cent in three or four years. This could be followed by a sunset approach, removing the mandatory sourcing clause after some years. It is believed that within this time SMEs would have improved their capabilities and developed strong linkages and market access to operate on their own.
These initiatives would be possible only if the government implements policies that are enablers in developing linkages between SMEs and the market. For example, there should be effective implementation of the model Agriculture Produce Market Committees Act by all states since the current Act restricts retailers from sourcing directly from farmers.
The process of liberalisation coupled with government support in form of investments in supply chain infrastructure, effective implementation of conducive policies and skill development to upgrade SME capabilities is a necessary step to make this sector more attractive and competitive in a global scenario.
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