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Getting real about retail PDF Print E-mail
Sunday, 27 November 2011 05:00
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Getting real about retail

Enough space for kiranas despite what Mamatadi says

 

Given how allowing 51% FDI in multi-brand retail is one of the biggest reform measures the government has taken in a long time (the Pension Bill needs Parliament’s approval), it would be a pity if a Mamata Banerjee is allowed to scuttle it. Since the pressure to retract will mount, including from a series of strikes by kirana owners, it’s a good idea to debunk some myths.

Take the kiranas-will-die one first. If Indian GDP grows 15% a year, that takes GDP from $1.8tn today to around $7.3tn in a decade; that takes the share of retail from $470bn today to $1.9tn. If, as projected, the share of organised retail grows from 6% today to 20%, that still leaves enough room for kiranas to grow at over 13% a year. The 20% market share, needless to say, is the stuff of consultants’ dreams, the same consultants who projected a 16% market share for organised retail today! Keep in mind there is very little space in markets in most residential districts of large cities where 51%-FDI retailers can go—given annual retail sales of around R6,000 per square foot, India needs around 500-550mn sq feet of additional

retail space each year, but what gets created is a fraction of this. Naturally, rentals are sky high, around 40-50% of revenues against a 6-8% that modern retailers can afford.

It’s also important to keep in mind that mom-n-pop outfits are not as consumer-friendly as is believed. Sure, they often sell on credit, have home delivery, and offer customised service—which is why they’ve survived while organised retailers who still haven’t figured out what store formats work best, have shut down 3,000 outlets in the last 3 years, including Subhiksha, which went out of business. But, compare wholesale and retail prices of fruits and vegetables, and a 70-80% difference is common—by cutting into the number of intermediaries, organised retail will deliver a better deal; buying directly from farmers will reduce their wastage loss, and can raise farm incomes by 25-30%. And, in any case, it is hypocritical to allow a Reliance or a Pantaloon, an ITC or a Bharti Easy Day while wanting to stop a Walmart or a Carrefour—to the extent they’ll hit kiranas, so will big Indian retailers.

But all of this is in the future since realising the savings dream will take a while as getting state government permissions and necessary real estate takes a long time, and retail is not a business that scales quickly since what works in one locality doesn’t work in another. To the extent a cold-chain infrastructure is required, a Reliance cannot be expected to build an all-India one, nor can a Bharti or an ITC. As happens the world over, this is done by third-party vendors—but they won’t come in unless they have enough big clients … Retail FDI has game-changer potential over the long-run. It would be sad to let a Mamatadi scuttle this.

 

Last Updated ( Sunday, 27 November 2011 05:02 )
 

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