NEW DELHI — India’s retail scene is in turmoil.
This story first appeared in the December 1, 2011 issue of WWD. Subscribe Today.
The government’s decision to open up multibrand retailing to 100 percent foreign ownership has set off a firestorm of protest, with parliament adjourned for the second day and a strike set for today that is expected to involve more than 10,000 trade bodies and will shut down thousands of stores.
Global retailers who were buoyed by the government’s decision last week now have to wait and watch as the political and business protests threaten the three-day-old reforms, which raised the ownership cap for single brand retail to 100 percent from 51 percent. This opened the door for megaretailers such as Wal-Mart, Ikea, Tesco and Carrefour to enter the market on their own if they wish.
Opposition parties such as the Trinamool Congress and the Dravida Munnetra Kazhagam are demanding a rollback of the decision. Parliament is expected to meet again today to discuss it and the opposition is demanding a vote on the issue in order to force a change in the decision, although the government is resisting a vote.
The government has pointed to the benefits of the move, which is backed by economists who believe it will allow faster economic growth; fight inflation, which has been hovering at about 9 percent, and help the $450 billion retail industry.
The opposition points to the possibility of thousands of job losses as their counterargument. More than 90 percent of India’s retailers are individual mom-and-pop stores.
“It is a philosophical signal to the rest of the world that India wants to catch up and that it is not a closed economy. That message is important,” said Darshan Mehta, president and chief executive officer of Reliance Brands, which has brought brands such as Diesel, Paul & Shark and, recently, Kenneth Cole into India. “In the next six months to one year, the floodgates will open to new brands. But I don’t think the present battle is about ideology. It’s more about political one-upmanship.”
Like many other large companies, he doesn’t believe the government’s decision will be a magic wand that transforms their position in retail. “It really doesn’t change anything for us,” said Mehta. “A lot of the brands believe that a partnership in India helps them since it is a complicated market and the partnership is not really limited by law.”
He said in terms of luxury, many brands in India have been going the franchise route, which may still be the one preferred by international labels.
“This proposal offers good prospects for large established Indian retailers. FDI would enable these players, attract capital for driving their expansion plans and, in addition, benefit from scale, cost efficiencies and technology brought in by foreign retailers,” said Anuj Sethi, head of Crisil Ratings.
He said FDI in retail would stimulate further investment in the sector. Crisil estimates FDI inflows of $2.5 billion to $3 billion over the next five years.
Anand Sharma, commerce and industry minister, has been actively trying to convince the opposition about the importance of retail growth and how it would impact the economy. He has been writing to members of parliament to win their support for the plan and the government ran full-page advertisements about it in newspapers on Sunday.
Sharma also clarified that 30 percent of sourcing would have to be done from small and medium enterprises in India, whereas the initial government proposal last week said this sourcing would have to be from small and medium-sized enterprises anywhere in the world.
Meanwhile, some states such as Tamil Nadu, Uttar Pradesh and West Bengal have stated that they will not allow foreign retailers to open stores there. These regions would be relatively small markets for major global retailers, though.
Even as the political opposition protests the government’s decision, some domestic retailers strongly support the move.
“It is a good thing for the economy,” said Kishore Biyani, ceo of Future Group, who pointed out that a chain like his has a huge head start over its international counterparts. Future Group is the largest retailer in India with about 16 million square feet of retail space across different formats including department stores, hypermarkets and food bazaars.
“FDI in retail will be a game-changer like [deregulation of] telecom. I see only a positive impact on employment,” said Rajiv Kumar, secretary general of the Federation of Indian Chamber of Commerce.
Thomas Verghese, ceo of Aditya Birla Retail, who is also chairman for the National Retail Committee of the Confederation of Indian Industries, said modern retail has grown fast in India in recent years, but so have the smaller mom-and-pop stores, which are averaging growth of 10 to 14 percent annually. The fears that the smaller stores will go out of business may not be rooted in reality, he said.
According to the confederation’s report published in August, the retail sector is expected to grow to $535 billion by 2013 with the share of modern retail at 10 percent. The report recommended that FDI in multibrand retail would enhance brand knowledge, consumer choice and help to promote branding in certain segments like fruits and vegetables, where there are only a few brands available.