FDI in retail is an emotional topic as people predict the death of the small retailer. This is unlikely. Large retailers such as Walmart, Tesco, Ikea, Reliance, Spencer’s and Big Bazaar will co-exist with small retailers in India. How is this possible?

Distribution is the backbone of Indian marketing. India has 14 million retail outlets for a $1.9 trillion economy, China has three million outlets for a $8.7 trillion economy, and the US has one million outlets for a $16 trillion economy.

Distribution in India is mostly a cash system, with low margins, liberal credit and high trust. The consumer, the brand owner and the retailer make up the distribution system. The brand owner and the retailer aim to serve the consumer but are not always aligned.

How will FDI in big retail impact India? Let’s look at some key factors.

Key factors

The first is consumer income. The number of people earning less than $2 a day in 2030 will be 640 million.

This consumer shops everyday, buys small packs, conserving cash. He will shop at small retail stores.

The small retailer buys in the morning, sells in the afternoon. This is a difficult ‘velocity’ model to beat.

In 2030, 41 per cent of India’s population will be urban; we will have 40 million cars and 300 million credit cards, all enablers for big retail shopping. This rich urban consumer will shop at big retails, with a maid in tow. Big retail’s attraction to this urban consumer is the brand range, experience, and assisted shopping facilities.

The second is the private label. Big retail thrives on private labels, especially in food. Private labels done by integrating the farmer and co-operatives will raise farmer incomes and reduce consumer prices. How?

A third of India’s 255 million tonnes of foodgrain production goes waste due to poor storage. FDI in big retail spurs the development of a cold chain, helping categories such as milk, water, cheese, meat and poultry. The third factor is organising the unorganised parts of distribution, namely, wholesale and nascent categories such as furniture, apparels, small electrical appliances, homeware, cookware and so on. Big retail will develop a quality ecosystem in these categories.

Wholesale challenge

The Indian wholesaler will challenge big retail and brands. Direct coverage in India is about two million outlets. Brands use wholesale for indirect availability. A small retailer in India travels a maximum of 15 to 20 km to visit wholesalers for his goods and carries back 15-20 kg to his outlet. Wholesalers offer credit to retailers based on decades of trust.

Cash and carry concepts such as Sam’s Club from Walmart and Metro to serve small retailers are doing well in Chandigarh and Bangalore, but will not kill the wholesaler.

How will big retail impact the small retailer? Small retail will beat big retail on responsiveness and service. It will serve as an effective top-up in rich urban areas and will be the primary shop elsewhere.

Small retailers who are moving out of retail do so for better opportunities; the few who are inefficient fold up.

Big retail drives footfalls through lower pricing. Since India mandates maximum retail price (MRP) on every pack, it is difficult to drive prices down in established categories. Brands are also organising small bands of retailers in new formats to build loyalty and counter-balance big retail.

Brands and big retail are ‘frenemies’. Brand leaders worry about private labels from big retail. Brand leaders innovate (e.g. razors), invest (e.g. the colas) in branding, and increase touch points (e.g. coffee) to compete with private labels.

Big brands in sectors such as apparel, technology and footwear will combat big retail by investing in their own branded outlets, while having a presence in big retail.

Consumers will browse the net for prices, walk the aisles of big retail to see the range, and visit brand outlets for the latest.

Brand talk

The third and fourth brand in every category will love big retail as this presents an opportunity in the form of higher trade margins and presence.

Brand leaders have reams of consumer data; big retail has tomes of shopper data, which brand leaders will want. Collaboration will emerge to manage the consumer journey.

Profitability is the challenge for big retail. High rentals, high energy costs, the wage bill, and high attrition are hurdles.

Selective outlet expansion is prudent; rapid expansion in India has been a loss-making proposition, and many big Indian retailers have died even before FDI in retail has arrived!

FDI in retail is not a monster; it will modernise Indian distribution by adding to what’s good. There is place for many formats to co-exist in Indian distribution. Big retail’s challenge will be: Collaboration with market leaders, the challenge from online retail and profitability.

Walmart’s annual sales are in the region of $450 billion. In 1962, Walmart’s earnings were 12 per cent of sales, in 2012, they were 3.5 per cent of sales. One wrong decision and profit evaporates in big retail.

While the small Indian retailer makes a cash profit every evening, big retail profitability is a 10-year wait!

( The author is former head of emerging markets for Nokia. )

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