Impact of FDI in multi-brand retail on Indian commodity markets

We are very close to it; yet we can be very far.

FDI (Foreign Direct Investment) in organised multi brand retail is a hotly debated topic in India and the industry is closely watching the events unfolding. The Committee of Secretaries, a panel of bureaucrats have recommended ushering in FDI in the segment though with certain riders:

The investor concerned should be investing at least $100mn.The format should be allowed to come up only in cities with population figures are at 1 million. This would mean only 36 large cities would currently be entitled for shop formats.

The recommendation, as such, is not a sure sign of FDI having been allowed. The Union Cabinet should now approve of the same. Nevertheless, it is an indication of the government sentiments pertaining to the matter.

The business logic behind FDI

Significant local knowledge is necessary to do business in India, irrespective of sectors.

India, given its diversity and resultant multiple tastes, warrants flexible business models that cater to a multitude of needs and wants. So, foreign players may need this local knowledge in abundance, especially to penetrate Indian multi-brand retail markets.

On the other hand, there are challenges in merchandising, supply chain and technology that Indian players face, when it comes to multi-brand retailing, as told by Thomas Varghese, CEO of Aditya Birla Retail.

This is a theoretical framework that would facilitate a win-win partnership; where both partners can learn from each other and create value.

The logic is sound from a business man’s point of view. But is it the same when the topic is approached from many other angles through many other eyes?

How margin-free markets can take a beating

One of the widely perceived and publicised benefits that come with allowing FDI in multi-brand retail is that it would arrest the sky-rocketing inflation.

“This may not be the case...”, points out Martin Patrick, an economist.

“The past experiences show that once the organised players come in, prices have not come down.” He said.

However he pointed out something interesting:

It may not be the so-called kirana-stores (you regular grocer cum stockist of all that you need) that would be negatively affected by the advent of these big players. It would also be the stores which employ 4-5 people, the so-called margin-free markets that would be affected.

Currently, these stores cater to a growing middle class; the stores may not be looking flamboyant or air-conditioned. But they cater to a rapidly surging middle-class whose members are being eyed by the big players.

“The kirana stores always have their place in the map; all because they have a space. They don’t survive because of the scale but for their location.” Patrick pointed out.

The so-called medium-type stores survive because of scale and they can hardly match the scale and price as offered by the biggies.

“There is also the case of these big players passing on the initial cost of setting up the supply-chain to customers.” added Sunil Sakthidharan, Delhi based economist.

Additional rider

Martin Patrick also suggested an additional rider be attached to the current norms. But it requires some additional home-work to be done, in his parlance.

“The government can allow for the big player stores to be in the newly developed urban centres where there is a concentration of new-generation families whose tastes match with the modern outlook and elite class living. This requires some additional studies.” Patrick said.

“Already, there have been a number of studies being carried out in this regard. The fine-tuning of the same would help you formulate a better policy.” He contended.

Such a measure can soften the negative impact which would otherwise create trouble for small players, he feels.

Impact on mandis and commodity markets

Generally, the big players that source produce directly from farmers categorise the same according to their parameters and would off take the superior grade and re-direct the lower grade produce to mandis.

This reduces the quality of produce as made available in the mandis and would also Lead to a price-crash there, past experiences tell.

“Generally, the big players would enter into forward contracts with farmers and when a crop failure occurs, farmers would be at a loss.” Martin Patrick said.

“Given the scale they command, the big players may even find it profitable to source from abroad and the sudden spate of imports would deluge the farmers here.” Patrick argued.

The futures market can see a wave of speculation in agri-commodities, as these players may enter the arena with their deep pockets.

“This can bring further volatility in agri-commodities.” Martin Patrick concluded.

As published in: http://www.commodityonline.com/news/Impact-of-FDI-in-multi-brand-retail-on-Indian-commodity-markets-41081-3-1.html