The west will wait....

For all the hoopla around the entrance in FDI in retail and other sectors, we Indians have not fully comprehended the reasons the west is in such a hurry to set up shop in our country. Like us, the western countries are just as protective and just as concerned about their own economies. The protective nature of the west might be hidden behind their investments and technological advances but the fact is the east is no longer just important to sustain western economies and their way of life but a necessity without which they will no longer be able to sustain their rising expectations and popular demands.

The capitalistic economic model sustained for so long has been based on growth and rising demand. An expectation the slowing growth rate of the west has not been able to sustain. This model of investment by taking up huge credit in order to grow requires that companies need to keep growing at a certain rate or they will implode. Be it growth in terms of GDP, population growth or growth in consumer demand, the developed world has reached a saturation point. The economic crisis we see today are just manifestations of this saturation. Manufacturers need to produce more, retailers need to sell more, banks need to invest more. But where will the demand, the raw materials and the labor required come from? The developing world can provide all this and more. But unlike the earlier centuries the west can no longer grab what they want by sheer force, they will have to participate in the development.

To the west India and China represent opportunities to keep their domestic population satisfied by giving them opportunities to grow. The sheer numbers in terms of potential purchasing power that these two economies together have is what drags them to us. That is why even though domestic incomes are dropping and unemployment is rising, multinationals are encouraged to invest in India and invest heavily. Companies know that if they can successfully leverage their international experience while at the same time adjust to local conditions India and China can rescue them from stagnation or even decline in their home markets.

Every sector in the country is in a nascent stage with potential for new entrants and ideas. While there are latent inadequacies in Indian infrastructure and decision making processes, the gradual opening up of the economy has given foreign companies time to study the market and the Indian customer. The young, upwardly mobile population ensures a market receptive to new ideas and brands. Unlike China, India has a stable political and social structure and have democratic institutions similar to the west. Thus engaging India makes not only economic sense but also strategic sense. The Chinese economy might be attractive for its size and efficiency but come inherent with risk. The Chinese model of huge investments in infrastructure and a controlled currency is untested and is considered unsustainable by many leading economists. India meanwhile follows a tried and tested model of organic growth both in infrastructure and in supply-demand growth.

If the Indian government can ensure continuity and consistency in reforms, there will always be companies willing to invest in Indian no matter how slow or regulated the reform process is. India represents a long term strategic investment to them. Thus it remains imperative that we take a slow and steady path to opening up the economy ensuring growth without effecting local industries. The opportunities globalization and the world economic system has thrown at us need to be utilized to solve our internal deficiencies. Corruption and infrastructure bottlenecks will have to be addressed.

They need us more than we need them. Something we would do well not to forget.

The politics of retail

The Indian government is today a minority. It's one major ally short of a simple majority in parliament. Two years into it's term, it didn't take any huge scandal or crisis to make this happen,  though there were no shortage of both,  but just allowing FDI in organized retail. How the times have changed.

True,  retail is an indispensable part of civil society and accounts for 11% of our GDP but it has never been a part of any five year plan or government scheme.  With 95% in the unorganised sector,  retail has been growing happily without any government intervention.  If there is demand, whatever it might be for, there's will be someone ready to sell it for a profit. Retail as an institution is easily far older than governments themselves.

When big Indian corporations came out with organized retail chains, there were but whimpers of protests. When full FDI was allowed in the back end, it barely made the papers. Why now this hue and cry against foreign investment.

Let us consider the various stakeholders involved one by one, the farmer, the shopkeeper, the retail employee, the customer, the country and the politician. Let us try to remove the hype created by the media and other political instruments and concentrate purely on the normal man's understanding of what is going on around him.

The common small farmer lives in a very micro level society.  Tell any farmer in India about any government initiative and his initial questioning will be limited to four basic questions. Will I lose my land?  Will I get more money for my produce? Will I get loans easily? Will I be able to work less? A positive answer to these questions and the farmer and family are happy. FDI as such will not be able to bring any change that Indian retailers haven't had the opportunity to provide.  The farmer really doesn't care if it's an Indian or a foreign company. Why should he?

The shopkeepers are the ones the media portray as the biggest losers. But are they themselves so worried? A normal kirana owner has the pulse of his customers. He has with him the best of CRM techniques in person to person interaction which no large retailer can compete with.  He understands that his share of the pie is large and growing enough to sustain him.  While the big players cater to the top 20-25 percent of the income pyramid,  he is the owner of rest of it.  While his customers might grow up to visit the nearest Big Bazaar,  there are enough growing up from below to sustain his shop.  McDonalds hasn't exactly destroyed the local tikki-waala has it. Growing congestion and rising real estate prices have already taken the rich metro customers out of his reach. It's again the politician and the trade unions that are doing his worrying for him.

The employee is happy. The unemployment is growing and the job market is not keeping pace.  Any new job opportunities are welcomed with open arms. The country has too many young skilled and  semi-skilled laborers to sustain everyday.  Foreign players are looked upon as saviors providing better pay and better working conditions. But considering the track record of major retailers like WalMart, they may be in for a shock.  Under more liberal labor laws,  retailers are notorious in the west for their treatment of employees. Expecting them to do any better here would be foolish.

The customer is ecstatic.  Rising competition and rising assortments can only lead to cheaper products and more variety.  The monthly grocery purchase now entails more than one option while products all over the world are available through multiple channels. Retailers are beginning to get more customers centric and customer satisfaction and retention are the new buzzwords. Foreign retailers used to serving highly demanding customers will surely bring something new to the table. The customer will remain the king.

The country really needs the confidence of investors. Terrible fiscal management and growing infrastructure needs has left the economy in dire need of foreign capital. FDI will increase FIIs boosting up the stock market as well as bringing much needed investment in infrastructure. More competition and efficient practices might drive down inflation giving the RBI more freedom to control our growing current account deficit. As the Kelkar report has put so explicitly,  growth is no longer an achievement,  it is a necessity our country needs to not collapse on the weight of its growing population. FDI across the board in all sectors previously protected is the need of the hour. We have a huge market. Now is the time to leverage it to fulfill the potential our country holds.

Last and unfortunately not the least are our politicians,  the policy makers.  The ones supporting FDI as well as the ones opposing it seem to have similar reasons and similar arguments.  In the game of politics it is easy to take a stand or raise one's swords on issues whose gestation periods are long and the benefits or losses immeasurable. Thus corruption or price hikes get sidetracked as they might fall prey to immediate action which no politician wants. FDI will be seen as a boon or a bane depending on which side of parliament you sit while larger issues can be swept under the carpet across the board. Sufficient loopholes have been kept for manipulations and the numbers game in parliament has got a safe issue to hedge its bets on. What else do politicians want.

Thus neither is FDI in retail going to usher in any golden age in the country nor will it cause any catastrophic collapse.  But as long as it makes economic sense,  it could benefit the population.  Whatever be the end result,  the politicians rest smug in the knowledge that the Indian will move on and survive come what may. 

India needs more such milkmen.

When Dr Verghese Kurien passed away, aged 90, India lost its leading innovator and visionary. One whose vision was able to transform the entire dairy sector, rewarding millions with quality products and all encompassing growth. But the lessons to be learnt from Dr Kurien’s life include more than just the dairy sector. It is an example of how India requires processes customised to our unique demographics and social indices and not custom made solutions peddled by MNCs and unabashed globalisation lobbyists.

The Indian growth story is unique. While opening up of the economy and a young population has led to excellent economic growth, infrastructure and social development remain bottlenecked in political and bureaucratic red tape and corruption. Compared to India, in China infrastructure and social development comes first, and they become the major force driving economic growth. We wait for the demand to arise and then build the infrastructure to satisfy it while in China the infrastructure is already in place to drive the demand. While this makes our economy more stable and sustainable in the long run, it has led to an income divide proportional to income growth.  Today, strictly in numbers, India has more millionaires than most developed countries while at the same time is straddled with more poor than most under developed nations.

This glaring disparity has led to global corporations making a beeline to India to be a part of the bludgeoning upper-middle and upper class market, especially in the metros. The metros and other Tier 1 and some Tier 2 cities have the infrastructure and a growing population to leverage their global practices and brand values. This upper class market is large enough with enough growth for both Indian as well as global players to grow and prosper. Thus it is no wonder that the lower section, without access to the same infrastructure and purchasing power have been neglected. Even in a cosmopolitan city like Mumbai, census data show that more than 40 percent of the population live below an income of Rs 2 lakh per annum. A market segment that will need innovative processes and long term investments to tap into.

 All the large Indian corporations today are multinational players with access to global resources and able to compete with their western counterparts in their respective fields. They have access to funds as well as technologies available all over the world. But they lack the motivation to get their fingers dirty in the muck of the great Indian cattle class. Business considerations do not lend support to innovative ideas and vision in markets that involve huge efforts and low margins. To expect western MNC’s who built their businesses in developed markets to take this step is unrealistic to say the least. Thus we see that out of the box thinking is limited to small entrepreneurs who do not have the capital or other resources to operate on a large scale.

To ensure that advantages of globalisation reach the lower strata, it is imperative that Indian businessmen and entrepreneurs awake to the potential that these sections of society have. Fresh ideas designed and customised to the specific problem areas are required.  The government, even if they do not build the roads, should ensure they do not build the roadblocks to new ideas. Dr Kurien was able to make a success of Amul incorporating the automatic milk bulk vending system re-engineered from a similar process invented originally by Rowe International of USA. Such a synergy of global technology and local customisation is required. India does not lack to brain power or the technological competence to ensure more such success stories. All we lack is the vision and commitment of the great man.

The farmer meets the corporation

The Sunhara Wal-Mart project at Hapur, Uttar Pradesh is a joint collaboration between the Sunhara India project, a non-profit initiative for women empowerment in agriculture and handicrafts, and Wal-Mart, the world’s biggest retailer as part of its CSR activities. Started in August 2011, the two year venture entails training of farmers and direct sourcing of their produce to Wal-Mart stores across northern India. Such projects, a direct concurrence of the Indian common man and an international corporation should be able to give crucial pointers of the impact of foreign players on the Indian grassroots. Now, more than ever, as the issue of FDI in multi-brand retail is at the forefront of political and economic debate.

The town of Hapur and the adjoining farmlands are a major supplier of staple vegetables all over north India. Consisting mainly of small farmers with small to medium landholdings, Hapur has a large population existing solely on agriculture. Sunhara, funded and supplied by Wal-Mart both with technology and manpower, identified small farmers, with landholdings less than one acre and gave them training and instructions on cultivation. In return, the farmers could sell their produce to them at collection centres at rates equal or more than the local markets called mandis. This made it convenient to the farmers as they no longer had to go to the mandi and empowered the women to also take part in selling the produce.

This initiative was not new to the farmers. Indian retailers and food processing companies have been using the same process for decades now. At Hapur itself, the villagers joining the Wal-Mart initiative are familiar with brands like Big Bazaar, Easy Day and Mother Dairy who also have such collection centres. Mother Dairy in fact, has had a presence in Hapur for around twenty years. It is not uncommon for farmers to have undergone training by three or four different companies. Although these initiatives have brought about new techniques and innovations to farming, the farmers are still vary of committing themselves completely to the organised sector for a variety of reasons. 

While local mandis will accept all the produce from the farmer and provide him instant remuneration, the Sunhara initiative will only accept a small amount of his produce. Wal-Mart sources only around one ton of produce a day from all the farmers combined making it difficult for farmers to harvest and transport in such small quantities.  Also remuneration for the sale is delayed by a month or more which can cause a lot of inconvenience to the marginal farmers. The organised players have very strict quality standards resulting in more than half the produce being rejected. To meet these standards, the farmers are forced to harvest before they normally do to cater to their demands. Even then, a farmer still has to go to the mandi to sell a good proportion of his harvest, most of it of the lower grade. A farmer’s wisdom understands that transporting higher quantities of various grades together will result in much less wastage than transporting small quantities of a single grade.

From the perspective of the company, only a minuscule percentage of its sourcing is done at these collection centres. The bulk is still sourced from the mandis where there is more flexibility and variety. The vegetables have a 2-3 day lead time to reach the retail outlets thus necessitating the purchase of not yet ripened produce. This initiative has not introduced any improvement in transportation and storage facilities.

Other than improvement in techniques and empowerment of women due to the convenience involved, this initiative has done nothing to improve some of the inherent problems of agriculture in India such as huge wastages, fluctuating prices and the financial insecurity of farmers. As a part of a social service initiative, no company, neither an MNC, nor Indian retailers seem to be ready to commit the investment required to bring about any long term change in the distribution system. Only when the scale of such operations are sufficiently high to justify investments in logistics and storage will there be sufficient economies of scale to make it attractive to the common farmer. Until then, factors the inability of even the large companies to ensure timely payment raises questions on the commitment they are willing to show.

Unless there is long term strategy and vision, such initiatives will only become another attempt that gets caught up in the malaises that affect our society today like inefficiency and corruption. This would be unfortunate for all involved, as there is a lot even an MNC can learn from the wisdom of the common man that would be lost.

Government v/s FDI: Who will win the battle??

“Govt notifies 100%FDI in single brand retail”- Economics Times, January 10, 2012.

This day shall be marked in the history of the Indian Retail Industry as the Golden day that promised to bring a swarm of dream luxury brands, which every individual yearns for. It brought a reason for the retailers to smile about with the opportunities bundled with the investment.

Then one fine day IKEA placed the “IDEA” on the back burner and Zara faced a road block. FIPB played a villain shattering the dreams of many “retailers to be”.  Government’s policy tantrums yet again disrupted the incoming beatitude.

                         

A lot has been said and nothing has been done so far. To sum it up, it’s just empty words and a huge outcry. The negative impact of FDI in retail on small retailers has been the major concern while rest everything has been neglected. The future retailers have been out casted from the entire picture. From a student’s perspective, its positive effects have been sidelined as FDI is supposed to bring a throng of job opportunities and a chance to work with the international biggies.

India needs to be investor friendly. It must find a middle ground for this issue. It is disheartening to see the blindfolded attitude of the Govt towards the positive outcomes that could be derived from the successful implementation of FDI in the sector. FIPB has refused to accept the Scandinavian furniture giant IKEA’s plea regarding relaxation of the 30% sourcing norm. China has been exporting to India in huge numbers. These imports have already killed millions of small enterprises across the country, and they don't bring FDI. In such a case IKEA which is making a legal entry into the country is not allowed to do so. FIPB has also rejected the Netherland based ZARA’s proposal to enter India with the brand name “Massimo Dutti” saying that the investment for opening the stores is being made by Zara Holding rather than Inditex, the owner of the brand while according to the FIPP rules the investment has to be made by the owner of the brand.

Multi brand retail chains like Walmart are waiting with their eyes wide open in hope and anticipation. With the approval from 11 states & Union territories, UPA Government still failed to gain the support and cooperation of its own allies.

Undeniably, the government is now seriously considering tweaking the definition of small and medium enterprises (SMEs) for giving a boost to single brand retail in the country. Aiming at bringing in more foreign investments in the country, the government wants to remove hurdles in way of such investments from across the sectors, including single brand retail. As per the present definition, all entities having investment of $1 million in plant and machinery would fall under the ambit of SMEs for the purpose of single brand retail. However, as the sector thrives, SMEs would grow and the $1 million definition would need tweaking.

As far as local retailers are concerned, breaking even has not been a challenge for them despite of the presence of the Indian retail giants like Big Bazaar, Reliance, ABRL etc. It is just a hype created by the government along with the opposition playing a spoilt sport. As for them, making a mountain out of a molehill and chanting a chorus of negativity has become a common phenomenon. But by doing this the Govt is subduing the advantages to be derived from the FDIs in the retail sector like the elimination of/reduction in the intermediaries’ cost, the benefit of which will not only be availed by the farmer but will also be passed down to the end consumer, more employment generation, growth opportunities etc. Also, The Economic Survey has pitched for allowing FDI in multi-brand retail, stating it could help tame food inflation and improve agri-commodity management.

The retailer’s cry for FDI and their longing to outshine others still remains unfulfilled. How long the lacklustre attitude of the Govt will last, is not known. But considering the current economic conditions with regards to the impact of the euro zone crisis, falling value of rupee and policy paralysis, one thing is for sure that FDI has become the Holy Grail for the Retail Fraternity. The hunt for which is on!!

What does FDI in multi brand Retail mean to farmers?????

They come, conquer, make you dance to their tunes and take your buck away! It was 64 years back we got our freedom and now when soothsayers point towards the dark skies in times of slowdown foreign money through FDI in multi brand is a scapegoat to revive the economy. But whether its true is hard to tell. The monopolistic buying power of the large retailers would weaken the marginal farmers' position, resulting in lower share of value to them, dictating of the production techniques and output by the larger retailers and destruction of diversity in Indian agriculture. The idea that the farmer will get a better price for his produce if FDI in Retail is allowed is not holistic. The open market does not work on altruism and social service. It negotiates the best for itself so it can corner the most for itself. Farmer suicides are not because they cannot sell, but because they are unable to get remunerative prices for their produce owing to inefficiencies in the value and supply chain, traditional buying and selling techniques in mandis, lack of proper crop management and large number of intermediaries.

Big retailers and food processors alter crop selection to have farmers produce at their discretion and not by will. Corporates would not like to mingle with small and medium farmers because they are at a position of advantage and would strike contracts with a few big farmers thereby making the small ones succumb. FDI in retail would help only those farmers who collaborate with multinationals and accept their conditions, meaning they begin growing only those crops decided upon by their collaborators. In the West corporate retailers control the entire supply chain of food and farmers have no place to sell other than to select corporations. Initially the farmers will be paid as per their demand for their produce by the MNCs. Once the traders are gone, the farmers will be forced to sell at rates dictated to them. Retailers would push the farming community towards growing genetically modified seeds with extensive use of pesticides and chemicals which would impact land fertility intensively.

There is already 100 per cent FDI in the agriculture sector which doesn’t seem to have done any good. There is a vast scope of cold chains to be built and better post harvest techniques to be deployed. If Adani could invest in setting up C.A (Controlled Atmosphere) stores why can’t the so called philanthropists of India Inc. do so? Or are they freezing their money in Switzerland.

The focus should be on revamping the mandis infrastructure and using modern techniques so that the largest chunk of the consumer rupee goes to the farmer and in turn consumers pay lesser price for the commodity they purchase. E-farm is a small start-up which has made use of the best logistic and reverse-logistic practices along with modern sourcing and proper crop forecasting techniques which in turn would help to keep a tab on inflation. Such practices are essential in modernising the agriculture sector.

Corporate don’t source from small farmers but carry out contract farming or approach large farmers. Small and medium farmers till this date approach the traditional system of mandis, retailers and HoReCa source from this channel mostly. The gap between demand and supply today is created by the middlemen by initially paying a higher price when the crop season begins and when the season is at its peak, the middlemen make the excuse of compensating for their losses by reducing the prices and the irony is that consumer is paying the same amount of money. What is threatening is the reduction in the number of options the farmer is left with to sell his/her crop. Foreign retailers would replicate the same practices initially by wiping out the middlemen, then the small retailers and finally the street hawkers. Eventually cartels would be formed by foreign retailers and prices would also be determined by them. Amul, the successful story of India’s dairy farming opposes FDI and Mr. Sodhi GCMMF’s Managing Director says “Farmers get the least returns from the modern trade and the so called efficiency benefits only the large retailers as they constantly drive down the prices” also integration with global retail chains, which operate across the world, will directly expose Indian consumers as well as Indian farmers to any future global turbulence.

*The views expressed in this article are personal and no organization, institution and individual with which the author is associated should be held responsible for this article. The author hails from a farming background and has seen and studied the agriculture/horticulture sector closely.

ZARA: Trend Setter Turned Down

Zara, the flagship company of Inditex Group based in Spain has the famed story of successfully replicating the hot trends of the fashion industry and reaching the wardrobes of its customers in just 15 days. It is not an innovator which believes in creating fashion rather it is an early adopters. It prides itself in manufacturing 11,000 distinct SKU’s annually in about 4-5 weeks against the industry average of 6 months and bravely discontinuing it, if it fails to become the “HOT SELLING ITEM” in the pilot week.

“Government rejects Zara’s holding position in single brand retail” screamed a national daily, which stated the Indian government rejecting its proposal to set up a joint venture company holding 51% stake with foreign equity participation for single-brand retail trading of Massimo Dutti brand which incidentally is a subsidiary of the Inditex group. The reason given was the violation of a rule framed by the Department of Industrial Policy and Promotion (DIPP) under which an investor must own the brand it proposes to bring to India.

The news is surely giving sleepless nights to not only Zara officials, but also IKEA’s top management which is all buckled up to inject 10,500 crores INR in “Third world” countries like India. Can this mayhem be blamed on blurred policies of the Indian government, not only concerning FDI norms but multi layered taxes and nuclear policies as well? In the 2012 Union Budget, Pranab Mukherjee stated that foreign single brand and multi brand retailers have to source 30% and 75% respectively of their goods locally. But the Foreign Investment Promotion Board (FIPB) fails to realise that it is the policies of these globally renowned companies which have made them efficient. Zara buys its fabric in advance in prediction of forecasting trends. Much of its fabric is in greige form which is printed or colored to the desired effect, as when it’s needed. In a country where the lead time for the fabric to reach its factories is 30-60 days, it takes another 10-30 days to create the desired garment which would ultimately defeat Zara’s 15 day theory. Again, it has quality standards to adhere to for which Zara has a vertically integrated organisational structure.

The Indian government should clearly convey to these foreign companies that they have to change their vision, mission and corporate strategies to suit the Indian scenarios if it cannot change or clarify the policies it comes up with. But there is still a flicker of hope that Zara can convince the Indian government to bend its policies and continue to stick to its image of “THE TREND SETTER”.

The world retail industry is counting on it.