There is a scene in the classic Tamil movie ‘MahakaviKalidasa’. Egged by ‘intellectuals’, an uneducated Shepherd , played brilliantly by SivajiGanesan, comes dressed as a prince to participate in the Swayamvar of the highly educated princess played by SowcarJanaki. In a wordless test of intelligence, the princess first shows a single finger and the shepherd shows 2. When she shows 3, he shows 4 and so on. She interprets his gestures in a manner he did not intend and marries him only to discover his(or her?) naiveté later that night. Rahul Gandhi’s recent endorsement of the UPA government’s move to expand FDI in organized retail reminds me of this scene. In batting for the proposal, Rahul Gandhi certainly sounded more confident than SivajiGanesan. But, was his position a result of a thorough consideration of the pros and cons?

Size matters

Cities with a population of more than a million will come under the ambit of this proposal. It is estimated that there are 53 such cities. Real estate rates at these top cities (not to mention the investment needed to set up the end to end supply chain from scratch) will disincentivize foreign retailers from building super centers as retail is a low margin, high volume business with a long gestation period. So, box stores and gigantic supercenters that are ubiquitous in the US are unlikely to spring up in Koramangala or Colaba  or KK Nagar.

Foreign Jugaad

There have been numerous instances where global majors have been forced to Indianize their go-to-market strategy . It is unlikely that a Walmart will import its US model into India. With a paucity of prime real estate at viable rates, foreign retailers will be forced to think of innovative ways to penetrate the market. One such way could be a partnership with existing Kirana stores.

 My neighborhood Kandanstores, owned by MrKandan, has been around for a couple of generations. MrKandanhas a wealth of knowledge about the local customers, but lacks the financial wealth to profit from it.ABharti-Walmart will have complementary wealth and needs.  Let’s say Bharti-Walmart proposes the following deal:

• Bharti-Walmart will arrange for MrKandan the money he needs to profiteer from his deep customer knowledge
• Kandan stores can benefit from the buying power of Bharti-Walmart. If HUL supplied Hamam soap at Rs 25 per unit to Kandan stores, Bharti-Walmart can get it for Rs20. So,MrKandan can slash his price and yet increase his profit and volumes.
• BhartiWalmart is offering to help Kandan stores in merchandise planning , inventory management(so that he never stocks too much or too less),product placement (to facilitate greater impulse buying), signage/labels (to better highlight promotions and discounts).
• The store can continue to run as Kandan stores, but Bharti-Walmart wants profit sharing. It will also help MrKandan scale up by bring in/training staff. (No child labor)
• Kandan stores will get a modern billing system and the government will get all the sales tax without pilferage (no under reporting sales to avoid tax)

MrKandan might turn down the deal saying he doesn’t want any outsider interfering in his business. He simply could be happy with things the way they are. But, neighboring Kamala stores, also a second generation kiranastore, might lap it up since her son was always reluctant to take over from her. A third kirana store owner might want to sell out or offer to lease his store. A fourth might think it’s a great opportunity to scale up, but might want to tweak the terms and conditions of the partnership to suit his needs. If a year down the line, Kamala outsells Kandan by 2x (assuming both had comparable sales to begin with), Kandan might be forced out of business. Should Bharti-Walmart be lauded for improving Kamala’s competitiveness and efficiency or blamed for putting Kandan out of business?

Difference in consumer behavior

The model explained above is nothing new. FMCG majors that sell  14.2Fl Oz shampoo containers in the US sell 60 ml sachets in India.  Indian customers have unique needs. Pantry loading is not the preferred way of shopping. People don’t drive pick-up trucks for 20 miles to go grocery shopping .On the contrary, Indians are used to having groceries delivered at home. Fresh food is preferred over frozen food. That perhaps explains why people still flock to their neighborhood stores for green  groceries (vegetables and fruits) . As for other types of groceries, grocers have thrived by maintaining excellent relationship with their local clients. In a country like ours, a significant chunk of population will still be attracted to its neighborhood grocer who can offer groceries on credit.That’s something any organized player – Indian or foreign- will find tough to replicate. Today, there is a clear segmentation in the market. The upper middle class that pays cash prefers the organized players, while the middle and the lower middle class prefer the easy credit granting kirana store.  The FDI move threatens the customer base of the incumbent organized retailers more than that of the kirana store.

Cash V/s Credit – Customer Segmentation

Back in the 90s, I remember my neighbor Akhila aunty taking a small diary – not cash- to do her grocery shopping. Today, Akhila aunty goes to a Reliance Fresh because she no longer requires credit. She also feels they have greater variety and lower price. She however buys her vegetables from her local kirana store since she feels vegetables and fruits are not fresh at Reliance Fresh.  My neighborhood has several Akhilaaunties . This mixed model makes me believe organized and tradition retail can co-exist – as they have since the entry of the Tata, Birla, Biyani and Ambani.

There is proof of this even from the western world. Albert Heijn is a chain of supermarkets in the Netherlands founded in the 19 th century. Real estate is more expensive in Amsterdam than even New York City. Yet, Albert Heijn runs a large chain of stores in the city in all sizes- ranging from a few hundred sqft to a few thousand. There will be an Albert Heijn in a 1 km radius in most parts of Amsterdam.  This is organized retail without a big bang approach in a high cost environment. Traditional mom and pop stores and street markets flourish along with the Dutch retail chains. Even in New York City, which has not allowed Walmart to set shop (but allowed CVS, Costco and Target), delis rule the roost.

When it comes to non-food categories, it has also been argued that foreign retailers will dump cheap Chinese products affecting the Indian industry. Does this mean the incumbents aren’t importing Chinese goods? It sure can’t be the government’s case that a Saravana Stores can buy from China but Sears can’t. In categories like apparel and electronics, the entry of Shopper’s stop , Lifestyle , Croma, eZoneetc has not reduced the appeal of Ranganathan Street and Usman Road (middle class shopping districts of Chennai).Why should we think an Ikea, Gap,Macy’s or Best Buy will change that. Tanishq and Swarovski have not weaned GR ThangaMaligai and VummudiBangaruChetty off their customers. Kellogs and Quakers haven’t made idly,dosa, pongal and pohaless attractive. They just have offered people greaterchoice .Different players cater to different segments of the market. Democracy is all about options and a billion people wouldn’t mind a billion options. But the government’s move to back pedal has deprived/ reduced the options available for Kamala and Akhila aunty

Predatory Pricing

This is a distinct and a real threat, but something that can be tackled by enforcing stringent reporting and audits.  Technology like EDI will enable SKU level reporting of prices. Retail analytics will enable the government to monitor SKU prices per store per neighborhood. The government MUST pull up players that attempt to game the system.  The government can use the data to get a more reliable measure of the inflation that the common man is battling. In addition, this data will throw some color on the effect that FDI is having on the price of essential commodities and serve as a basis for initiating any course correction, if needed.

 Another option is to fix an additional MRP – Minimum Retail Price and enforce it the same way it does the Maximum Retail Price. This will ensure that the price of each SKU will move in a controlled band.

 In essence, the FDI move, if introduced with the necessary safe guards, has the potential to benefit our society by spurring competition and forcing traditional players to cut some slack. It increases the options available for everyone around and will greatly reduce, if not eliminate, child labor. The government will benefit from higher sales tax receipts.

 Any move that changes the status quo (especially ones that seek to modernize/improve) is bound to adversely affect some section(s) and benefit some other(s). The ruckus that was created when the government introduced computerization may still be fresh in some people’s memories.The FDI decision is quite complex. The UPA will do well to remember H. L. Mencken’s words – “For every complex problem there is an answer that is clear, simple, and wrong.” The easiest course of action is to pander to the most vociferous group or take the path of least resistance. A true leader resists such myopic urges. The government might well decide to put the move in the backburner forever (though reports suggest otherwise). But, whatever it does must be based on a careful analysis of the facts and it must be fully aware of its implications. Otherwise, the government’s moves will be no different from SivajiGanesan’s actions in MahakaviKalidas. The movie at least had a following scene where there is a divine intervention to make the shepherd truly intelligent and transform him into Kalidasa. I am afraid there is no such option for the UPA here.

The author has worked (indirectly) in the retail sector ,lived in countries dominated byWal-Mart, Carrefour and Albert Heijn and interviewed several kirana store owners as part of an empirical study on the retail sector. The author’s twitter handle is @murhari