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FDI in Multi Brand Retail

by: Prof. Sri Ram Khanna Managing Editor, Consumer Voice, New Delhi

& Professor , Dept of Commerce, Delhi School of Economics, Delhi University

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Implications of Organsied Retailing for Consumers

Vertical Issues Specific to Product Groups e.g. Food Standards , Nutrition & SafetyHorizontal Issues related to Greater Competition : Large vs Small RetailingConsequence of Economic Growth , rise in GDP, PCI and standards of livingPolitical implications for Vote Banks and their contestants

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Vertical Issues

Better compliance to standards e.g Food Standards and their ComplianceBetter Nutrition ,Safety and Labelling for consumersIt could Reduce Corruption in Food Control systemsCan it Provide Traceability ( Mustard Oil Deaths)

Impact on market

Consumers

Farmers

MSMEs

Small Retailers and Wholesalers

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Implications for FarmersProvides alternative buyers to Agri. Mandi under APMC Regulations

Introduce Contract farming to farmers

Possibility of quality agr inputs and sound technical advise

Reduce Exploitation of farmers at Mandis

Farmers organsiations like BKU welcome the reform

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Implications for MSMEs

Opportunity for scaling operations as large retailers have economies of scale

Long run supply contracts for Private labels owned by large Retailers

Can Circumvent distribuion cahannels to sell direct to Retailers

Case in point: Auto ancillary producers have scaled operations due to Auto FDI

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Implications for Small Retailers

Greater Competition at Retail will bring down retail markups and profits

Traditional Retailers will have to work harder and innovate to maintain sales in face of competition

No immidiate threat to their existence but impact will show over medium and long term

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Implications for Traditional Wholesalers

No visible impact inspite of FDI in cash and carry wholesale by Metro,Walmart

They will continue to serve traditional retailers but margins to come down due to downward price pressure

Will slowly lose market share over Medium and long term – gradual change

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Implications for Consumers

Downward pressure on retail prices will provide consumer savings

Below MRP will become the norm

Greater Quality,Choice for consumers

Availability of low priced Products for bottom of the pyramid with large scale sourcing

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Large Retailers in Japan1. Japanese law gives the small retailer enormous advantage over the development of larger stores and

competition. All these factors have supported the continued viability of small stores

d) 2. Large-Scale Retail Store Law and Its Successor: Competition from large retail stores controlled by Daitenho - the Large-Scale Retail Store Law. Designed to protect small retailers from large intruders into their markets, the law required that any store larger than 5,382 square feet (500 square meters) must have approval from the prefecture government to be "built, expanded, stay open later in the evening, or change the days of the month they must remain closed." Proposals for new "large" stores were first judged by the Ministry of International Trade and Industry (MITI). Then, if all local retailers unanimously agreed to the plan, it was swiftly approved. Without approval at the prefecture level a process that could take several years (10 years) for approval. Japan's largest supermarket chains needed 10 years to get clearance for a new site. Toys "R" US fought rules and regulations for over three years before it gained approval for a store.

(See Page. 479)

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Large Retailers in Japan 3. Regulations On Japan have changed : Large cracks in the system: the most recent is the Large-

Scale Retail Store Location Act of June 2000.

New law takes MITI out of the approval process. Local government has the authority to block construction if it thinks the new project will exacerbate pollution, traffic congestion, or noise.

e) 4. Changes in the Japanese Distribution System: Specialty discounters are sprouting up everywhere, and entrepreneurs are slashing prices by buying direct and avoiding the distribution system. Kojima, a consumer electronics discounter, practices what it calls "global purchasing" and buys merchandise anywhere in the world as cheaply as possible. Kojima's tie with General Electric enables it to offer a 410 - liter GE refrigerator for $640, down from $1,925, to reduce the 550 - liter model from $3,462 to $1,585.

The "new" retailers are relatively small and account for no more than 5 percent of retail sales. But the impact extends beyond their share of market because they are forcing the system to change.

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Expectations from Organised Retail

Improve Food Quality & protect Indian consumers from risks of food borne illnesses due to microbial pathogens, bio toxins and chemical or other contaminants in food.

Encourage holistic approach from farm to table to reduce food borne hazards for consumers

Adopt modern principles of Risk Analysis based on better scientific knowledge of food borne illnesses and preventive measures for food safety and quality.

Bring the best practices in Value Chain to Indian consumers

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Expectations………..

Improving the level of public safety from human risks from food and food related illnesses to reach global standards.

Food standards should include components that will enhance the level of nutrition and human safety from the health point of view.

Truth in communications on food labels and in food advertising.

Better Implementation of Food standardsImproved consumer awareness about quality, safety, nutrition and standards for a healthy lifestyle

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Horizontal Benefits of Organised Retail

Enhancing Competition between Large & Small Retailers

Improved Product Quality and Lower Retail Prices

Greater Degree of Consumer Protection

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FDI vs Domestic Capital

FDI brings with it mgmt systems, technology and global sourcing

If it has worked in a wide range of industries why not multi brand retail

Decentralised retail has lesser degree of competition FDI will shake it up

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India is not the first Country: FDI and organised retailing in many countries

Introduce safeguards eg. Japan provincial governments license stores above floor size Make declaration of FPP mandatory along with store MRP against deceptive pricing. Package to assist small retailers to form chains , retails coops with finance, tax incentives in affected areas.Start with discount stores on periphery of cities

See my blog on this subject : Wordpress.com/sriramkhanna

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Thank You

www.consumer-voice.orgsriramkhanna@yahoo.co.in