the fdi in retail business pro-cons single brand vs multibrand retail

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  • 8/12/2019 The FDI in Retail Business Pro-cons Single Brand vs Multibrand Retail

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    The FDI in Retail business pro-cons Single brand vs Multibrand Retail

    In the fond memories of Dev Anand,

    Whats the difference between Single brand vs Multibrand retail?

    S ingle Brand retail

    Nike Company opens outlets in Abad, Banglore, Delhi and Mumbai selling nothing but Nike

    Shoes, Nike wrist-watches and Nike t-shirts only.

    This is single brand retail.

    FDI in Single-Brand Retailing was permitted in 2006, to the extent of 51%.

    These were mostly outlets for sportswear, luxury goods, apparel, fashion clothing, jewellery, hand

    bags, life-style products.

    But neither the Political parties nor Local Kiranawala raised any voice against this,why? Because

    these are high-end luxury items for brand

    conscious upper middle class and rich class people. It doesnt hurt population at large. It was not like

    people would stop purchasing from localgarment store to get Nike or Adidas.

    Multi-brand retail

    Big Bazaar opens mall in above cities: selling t-shirts of multiple-brands such as Reebok, Nike,

    Adidas, Allen Solley, Van Huesen, Peter England etc.

    +and+ they also sell unbranded t-shirts (you know those buy one get three t-shirts free from unknown

    companies.)

    So this is multi-brand retail: when an outlet sells a product (tshirt, tie, shoes anything) of more than

    one brand.

    Retail means when product is sold to the ultimate consumer (common man)

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    Argument against FDI

    Anti #1: will lead to mass-unemployment

    1. Retail sector in India is the second largest employer after agriculture. Almost 33 million people

    involved here.

    2. Now the problem part: Disguised unemployment.Father and two Sons running a farm,

    producing 200 kgs of wheat. You take out any two members,

    the production still remains 200 kgs. Same problem goes with family owned-operated retail stores,the intermediaries and middle agents.

    3. What should be done? Obviously one of the two sons ought to get himself in other sector (service,

    construction, manufacturing, industry, etc) But

    there is lack of opportunities, the manufacturing sector is not growing at the pace. So the

    argument=:Displaced retail-operators will not be absorbed

    in other sectors. This FDI will lead to unemployment.

    Although this unemployment argument is flawed because1. Walmart cannot open malls in every nook and corner of India. Their electricity, staff and securitycosts will surpass their profit margins.

    2. Customers cant goto Walmart on daily basis for attractive discounts because the petrol cost (and

    time wasted in traffic) will negate the discount

    on small purchase. So theyll be using local small-retailer for daily requirements of bread, milk,

    newspaper etc.

    3. Did STD booth-operators become unemployed after advent of mobile phones with zero roaming

    charges and free incoming? Nope, they diversified and

    started running Xerox and cybercafs.

    4. Did local Udipi owner ran out of business because of McDonald / KFC? Ofcourse not.

    Anti #2: Predatory pricing

    Walmart or any other MNC retail mall, for the first 3-4 years theyll give heavy discounts and

    seductive offers, even if they make loss in the deal.

    Result : all the customers in a particular city are hooked to walmart only.

    The smalltime retail players cannot run business giving such heavy discounts, they close down.

    Once all competition is eliminated with this

    predatory pricing Walmart will slowly stop giving discounts and recover their losses by increasingthe MRP.

    Since these big MNCs have deep pockets, they can affort this sort of loss. But in the long term, they

    recover everything.

    Same way Once the small time retailers are out of business, Wal-Mart will start exploiting farmers,

    paying them extremely low money for their produce, because

    now Wal-Mart is the sole retailer in the city.

    counter arguments: Predatory pricing1. Customer thinks of Traffic, time and petrol cost involved before visiting Walmart everynow andthen. Not like someone would go 10 kilometers, just

    because the mall is giving Rs.3 discount on apple juice.

    2. There is a Competition Commission of India to look into this matter. (earlier MRTP, Monopoly

    and restrictive trade practices act)

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    (sidenote) Another example of Predatory pricing is our airline industry. One of the prime reasons

    why theyre making losses.

    Anti#3: India will become dumping ground for Chinese products

    Dumping means, suppose a ballpen is sold for Rs.10 in China but they intentionally export it to

    India at the price of Rs.5, in order to ruin the business

    of local Indian pen-producers and to capture the Indian stationary market.

    China is notorious for this dumping tactic, earlier we had to impose Anti-dumping duty on their

    rubber products and tires.

    Some believe that entry of Foreign retailers will facilitate the Chinese scheme of dumping our

    market with their cheap products.

    Arguments in favor of FDI in retail

    Pro#1: No more wastage of agro-produce

    India is the second largest producer of fruits and vegetables,

    If we are the 2ndbiggest producers of fruits and vegetables, why are we not a big name / exporter

    in world market? And more

    importantly, if we are second largest producer, then why is so much inflation in food items?

    Because Post-harvest more than Rs. 1 trillion worth farm produce, especially of fruits, vegetables

    and other perishables, is wasted due of lack of

    storage and transport facilities.

    More than 50% of this can be saved, if weve proper cold-storage facilities.

    Government is not doing much about this (duh they are unable to save even the wheat in PDS, let

    alone cold-storage) and the private Indian players

    donot have much money to invest in this cold-storage chain or those expensive big transport-trucks of

    America that we see in Discovery channel.

    So if FDI in retail is allowed, the MNCs would invest in cold-storage chains and those big transport

    trucks. Means lower wasted of produce. More

    supply of fruits and vegetables. According to supply-demand rule the prices will go down.

    Right now, 100% FDI Is allowed in Cold-storage chain, but foreign players are not coming there

    because theyre not allowed to sell it in retailmalls. There is not much profit margin in operating a cold-storage alone. Itd take years to recover

    the investment. Only if MNCs are allowed to sell

    the produce as well in their retail malls, theyll feel interested in investing in this cold-storage game.

    Similarly FDI in Wholesale trading was allowed upto 100% since 1997.

    Pro#2: Farmer gets more money for his produce

    Indian Farmer doesnt have cold-storage or transport facility, if he grew 200 kilos of carrots, he has

    no option but to sell it as soon as possible

    before it get spoiled. The middle agent buy this produce for as low as 2-4 rupees per kilo, but by thetime it reaches market, the price jumps to 25-30

    rupees per kilo. WHY?

    Indian Truck Transport: Overloading and Bribes

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    There is no organized truck- transport service, the truck operators are running in extremely

    competitive environment so theyve to overload their

    trucks. Once this overloaded truck goes through checkpoint, policeman will demand bribe for

    flouting the road permit provisions.

    Since the truck is overloaded, engine efficiency is reduced. He has to get his truck repaired

    frequently.

    The road quality and traffic Management is bad, more diesel is consumed.

    Trucker will add all these costs (bribe, repair, extra diesel) in his service charge.

    Truck reaches the city, your local vegetable-vendor pays to offload the carrots but he gotta maintain

    his own profit-margin as well, (+ the bribe he

    has to pay to local policeman, municipality inspector etc) so the carrots that were lifted for 2

    rupees, ultimately get sold for 25 rupees a kilo after

    cutting everyones Commission.

    When an organized MNC retailer gets in picture, he has his own extremely efficient and streamlined

    transport service. So there is no overloading of

    trucks, there is very systematic packing of goods. His truck maintenance cost is thus very low andthere is low wastage during transport.

    Second, He doesnt have to pay so many bribes at every level, because

    1. There is no overloading of trucks, papers are in order. Less chances for policemen etc to blackmail

    him into paying bribe.

    2. He got deep pockets, he gives big annual donations for election funds to the ruling party and

    Diwali gifts to the concerned district officers.

    Thats why small time petty officials such as police, municipality, food n sanitation inspector cant

    dare to bother him every now and then, as they doto small time retailers.

    So MNC retailers cost price is quite low compared to small -time retailers. Hence he can afford to

    give attractive discounts to customers as well.

    Same reason why many political parties dislike MNCs in Retail, you can extract more election-funds

    from 1000 small time players compared to from one

    big player. Big player is less susceptible to arm-twisting compared to a small player.

    No more intermediaries / Middle men in the chain= Lesser levels of Commissions

    Right now Intermediaries [middle agents] dominate the value chain. They often their pricing lacks

    transparency. They often run secret cartels, so

    even in open auctions, farmers dont get good price for their produce.

    Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and

    non-transparent character.

    These elected cooperative marketing societies and Mandis are more or less same BJP vs Congress

    fight for domination in university elections, there is

    hardly anything positive reform done for the students.

    According to some reports, Indian farmers realize only 1/3rdof the total price paid by the final

    consumer, as against 2/3rdby

    farmers in nations with a higher share of organized retail.

    A study commissioned by the World Bank : Why India doesnt earn much money from exporting its

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    Fruits and vegetable (even though were second largest

    producer) = Same reason, Non-competitiveness. Bad supply lines.

    A price that the farmer receives for a typical horticulture product is only 1215 per cent of the price

    the consumer pays at a retail outlet.

    Small and Medium scale industries

    Example small time cushions, toys, shoes, plastic wares maker. They dont see much business

    because they dont have the avenues to sell theirproducts. Big mall with big floor space, provides them opportunity to market their products and get

    customers attention.

    Assured quality, no adulteration

    Tune into Aaj Tak newschannel during afternoon, it is always somewhere in Uttar Pradesh, they

    caught adulterated Milk, Milk products or soft drinks

    produced using banned chemicals.

    More than 40% of the medicines sold in rural and semi-urban areas of India are of fake brands.

    For an MNC retailer you can atleast feel confident that it wont be the case.

    More competition = Better prices and products

    Remember once upon a time, Mobile calls used to cost 7 Rupees per minute and incoming wasnt

    free. Why? Because there was low level of competition.

    Barely 2-3 players in the market. FDI can be a powerful catalyst to spur competition.

    Trickle-down Theory

    To open a big mall, walmart has to purchase land and construct a big building= lot of laborers,

    masons, plumbers, electricians employed.

    Same way farmers are getting more money so all these people have more money in their hands and

    they use it to purchase bikes, mobiles etc. so more

    demand and more employment.

    Fear exaggerated

    Fears of large adverse effects on existing retailers are grossly exaggerated especially since modern

    domestic retailing has begun in any case via

    desi retailers such as Big Bazzar and Reliance. (10thplan document)

    Suggestions for safeguards

    1. Entry of foreign players must be gradual with social safeguards so that the effects of labour

    dislocation can be analysed and policy fine-tuned.

    2. Foreign players should initially be allowed only in metros cities only.

    3. Gradual opening of the retail sector over a period of 3-5 years to give domestic industry enough

    time to adjust to the changes.

    4. More stringent Compulsory corporate social responsibility requirement (e.g. Ask them to open 1

    school and 1 clinic in every city where theyre

    operating etc.)

    5. Regular monitoring of mall-inventories to see that India is not used as dumping ground for Chinese

    products.

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    Some reports for mythbusting

    ICRIER STUDIES ON: (i) FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR-INDIA (2005)

    and (ii) IMPACT OF ORGANIZED RETAILING ON THE UNORGANIZED SECTOR-2008

    #1: Not as much job loss as feared

    1. Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of

    business and profit in the initial years after

    the entry of large organized retailers.

    2. The adverse impact on sales and profit, however, weakens over time. There was no evidence of a

    decline in overall employment in the unorganized

    sector as a result of the entry of organized retailers.

    3. The rate of closure of unorganized retail shops in gross terms was found to be 4.2 per cent per

    annum, which is much lower than the international

    rate of closure of small businesses. The rate of closure on account of competition from organized

    retail was found to still lower, at 1.7 per cent per

    annum.

    4. There was competitive response from traditional retailers through improved business practices and

    technology upgradation.

    #2 good for consumers

    While customers from all income groups saved through organized retail purchases, the lower income

    consumers saved more. Thus, organized retail is

    relatively more beneficial to the less well-off consumers.

    #3 Intermediate players

    There was no evidence of an adverse impact by organized retail on intermediaries. There is, however,

    some adverse impact on turnover and profit of

    intermediaries dealing in products such as, fruit, vegetables, and apparel. Over two-thirds of the

    intermediaries planned to expand their businesses,

    in response to increased business opportunities opened by the expansion of retail.

    #4 More money to farmers

    Farmers were found to benefit significantly from the option of direct sales to organized retailers. The

    average price realization for cauliflower

    farmers selling directly to organized retail was about 25 per cent higher than their proceeds from sale

    to regulated governmentmandis. The

    profit realization for farmers selling directly to organized retailers was about 60 per cent higher than

    that received from selling in the mandis.The difference was even larger when the amount charged by

    the commission agent (usually 10 per cent of sale price) in the mandi

    is taken into account.

    Scenario in other third world countries

    FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand

    without limits on equity participation (that is

    100% FDI allowed)

    Thailand: Since 1997, 100% FDI. Positive result: Thailand has now become an important shopping

    and tourist destination.