On 6th June, the Indian government (ministry of commerce) provided ‘clarifications’ on its policy governing foreign investment in supermarkets (or multi-brand retail). While the foreign retailers were waiting for this communication and it was anticipated that it would pave the path for FDI in retail, both foreign and domestic retailers seem to have given it a clear thumbs down. Not surprisingly, therefore, none of the foreign retailers has indicated any interest on going ahead with investment plans.
The clarifications create interesting possibilities which are worth mulling over. Provided below are some of the ‘clarifications’ – as stated – and possible implications.
The clarifications said: 50% of the total investment in supermarkets have to be in so-called back-end infrastructure; the company can’t acquire supply chain or back-end infrastructure from other existing companies; and franchising isn’t a route through which these companies can expand to states that do not allow foreign direct investment (FDI) in supermarkets.
“Entire investment in back-end infrastructure has to be an additionality. The entity can invest only in greenfield assets and it will not be possible to acquire supply/chain/backend assets or stakes from an existing entity,” the industry department said in its clarification…
Back-end infrastructure could be at the point of sourcing, in logistics or cold-logistics, warehousing, etc. The supply chain infrastructure management in India, particularly logistics, is highly unorganized. Individuals with even one or two vehicles operate as transporters.
Provision for acquiring infrastructure could have created opportunities for aggregating much of these unorganized players by means of acquisition by the larger ones. If the new players would create new infrastructure now, would there be a glut in backend infrastructure? Also, this could mean that like the much debated subject ‘death of the kiranas’, there is possibility of death of the small time transporter and warehouse owner too, in these supply chains.
It is quite clear that as the large foreign players invest in supermarkets and competition increases, many small and regional domestic players may have to wind up shops. This would leave the servicing supply chains (back-end and front-end) under-utilized as well as without any takers (read: buyers).
It means companies such as Wal-Mart and Carrefour that have invested in so-called cash-and-carry chains (or wholesale chains) through Indian partners will have to make further fresh investments in back-end infrastructure and cannot show their existing investments as proof of having met the criteria.
The clarifications also said that a retailer that has already invested in the cash-and-carry business has to keep its multi-brand retail business separate “through different entities”. The foreign investment made in back-end infrastructure for the multi-brand retail business cannot service or supply goods to third-party retail chains while the cash-and-carry operation of the same company is free to do so.
This could mean that some of these players (Walmart, Carrefour,…) would need to develop and maintain different supply chains for wholesale chains and retail chains businesses. But if the wholesalers serviced by their cash-and-carry businesses are ultimately going to compete for customers with their retail businesses, can they continue to run both the businesses?
And foreign retailers can’t buy existing stores.
The retail sector growth in India since the last decade has been driven more on hype than on fundamentals. There was a period when retail stores were coming up like mushrooms not just in the metro cities but also smaller cities and towns. While everyone thought that is the way of buying of future, most of them were shutting shops within a year of their opening. The largest retail chain owning business is neck-deep in debt today and its largest revenue generating format doesn’t earn money.
These players would clearly have looked forward to selling of their chains with the new policy rules. The clarifications come as a clear dampener for them. So, we have new strong players coming in and creating further capacity in the front-end while most of the existing ones continue to bleed – and no one to buy them out.
The department also clarified that 30% sourced through small industries has to be sold through the front-end stores and cannot be distributed through its cash-and-carry business or exported for the global operations of the foreign investor.
However, the foreign companies are allowed to invest in back-end infrastructure in any state, including the ones that are currently opposed to FDI in multi-brand retail and not necessarily in the one where they are opening front-end retail chains. However, back-end infrastructure so developed cannot be used to open stores on a franchisee model as this is not permissible under the existing policy.
This provides great opportunity for some states to become sourcing hubs for the retail chains – without actually affecting the kirana population. Of course, this would depend on whether the state has natural resources or skills/ craftsmen/ small scale sectors of interest to the retail chains, providing high quality infrastructure and congenial atmosphere would also be differentiators.
Acknowledgement
Excerpts taken from news article titled ‘Govt tightens multi-brand retail rules’ in Mint dated June 7, 2013. The following is the link to the complete article
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