Corporate Jun 9, 2011
Mukesh Ambani told shareholders during the annual general meeting last week that Reliance Retail was the largest food retailer in the country. Pantaloon's Kishore Biyani asserted that his company generated the highest revenue in the sector.
So who's No 1? The answer is irrelevant, for the world of Indian retail could be in for a shake-up if government plans for opening up the sector to global giants are any indication.
For the record, this is what the numbers show. Reliance Retail reported revenues of Rs 3,132 crore for the year ended March 2011. Kishore Biyani asserted that Pantaloon Retail would report revenue of Rs 3,200 crore for the year ending June 2011. By June, maybe Ambani can cross Rs 3,200 crore. So we still won't know for sure.
But both are minnows in global retail.
Wal-Mart, the Big Daddy of retail, reported revenues of $421 billion in 2010. This is almost a third of India's annual GDP. Carrefour, the French retailer, reported revenues of $150 billion in 2010.
The government is eager to bring them in by allowing foreign direct investment (FDI) in multi-brand retail. It has started making a strong case for opening up the sector with discussion papers and committee recommendations at its disposal.
Wal-Mart has already welcomed the suggestion by an inter-ministerial group for allowing 51% FDI in multi-brand retail. (Although it comes with riders).
But it's not a done deal. India's retail 'giants' are known to be opposing the entry of foreign firms just yet. They feel the Indian market is still too small for the Godzillas of global retail.
But the economic case for big retail is strong in the context of food inflation. India's supply chain from farm to fork is so inefficient that neither farmers nor consumers benefit.
A report from the Department of Industrial Policy and Promotion (DIPP) says that farmers get just a third of the total price paid by the final consumer, as against two-thirds realised by farmers in nations with a higher share of organised retail.
The entry of big retail will reduce prices for consumers while raising it for farmers.
The political problem is that big retail demolishes medium retail chains. A study put out in March 2011 on 'Foreign Direct Investment in India's Retail Bazaar: Opportunities and Challenges', by Anusha Chari of the University of North Carolina and TCA Madhav Raghavan of the Indian Statistical Institute says that having a chain store in a market makes roughly 50% of the discount stores unprofitable.
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Wal-Mart's expansion over the 1990s explains about 40-50% of the net reduction in the number of small discount stores in US.
However, the government is unlikely to focus on retailers in India as the focus is on controlling inflation than protecting the interests of Ambani and Biyani. It will, however, have to be careful to protect the corner kirana shops, which run into millions and have strong lobbying powers.
The same study argues in favour of opening up the sector keeping the 'inflation control' objective in mind. "Taking into account demographics, store characteristics, and market conditions, corroborating evidence suggests that Wal-Mart decreases prices by 6-7% for national brand goods and by 3-8% for private label goods," the findings say.
Price decreases are most significant in the dry grocery and dairy departments. In the Indian context, this assumes significance since 65-70% of the rural household consumption is food.
One reason why the government has failed miserably in tackling inflation is the poor storage and transportation infrastructure in the country. Every other day, there are media reports of staples rotting in government-owned warehouses due to lack of adequate infrastructure.
The study points out that India is the world's second largest producer of fruits and vegetables in the world after China, producing around 180 million tonnes per year. "Official estimates are that about 25-30% of this produce goes waste between harvest and consumption," it says.
The entry of big retailers will throw up a bonus: enhanced exports. "The world's largest retailers - Wal-Mart, Carrefour, Tesco and Metro - entered China after 1995 and their subsequent expansion in China may have influenced Chinese exports," the study adds.
For politicians, tackling food inflation and raising exports may matter more than protecting the short-term interests of a few Indian retail giants.
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