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Organised Retail Bound to Grow
Organised retail today accounts for less than 5% of India’s retail business, but is bound to grow, forcing choices on the government, and upon itself. China’s experience and those of other Asian countries that recently modernised their retail sector can provide valuable insight on what choices make sense. Serving local consumer tastes in China with over 1.3 billion people poses a similar challenge in India, with its 1.15 billion people. Chinese regulations, at both the central and local levels, had created confusion and difficulty for retailers trying to open new businesses or acquire established ones.
India’s regulatory patchwork frequently impedes the efficient flow of products and needs to be coordinated across states and local jurisdictions. Finally, the Chinese transportation infrastructure varies across the country’s vast expanse. They are modern and highly efficient , especially in urban and coastal areas, and organised retail is most successful here. India needs better transportation and cold-chain supply-chain infrastructure across the country. Loosening foreign entry into the retail sector should be based on a strategic quid pro quo: the profit potential of India’s large retail market for retail operations know how and investment that are critical to modernising and improving the efficiency of Indian retail.
Taiwan opened up its retail sector to foreigners in the 1980s without creating a regulatory environment for the emergence of a strong retail sector. Predictably, foreign companies dominate Taiwanese retail today. In contrast, Japan’s distribution networks and regulatory environment have been inhospitable to foreign retailers and the Japanese pay today for this absence of competition with some of the highest retail prices in the world. South Korea and China managed the process of foreign entry more gradually, initially encouraging joint ventures between domestic and foreign retailers before looser regulations on FDI in retail were brought in. Both countries now have the benefit of a vibrant domestic retail sector, and the competition between domestic and foreign retailers has yielded low prices and good service.
India is already following China’s example , initially encouraging joint ventures between domestic and foreign retailers before allowing 100% FDI in organised multi-brand retail. This gradual opening up should preserve a vibrant domestic retail sector in the long term, and provide India with a solid foundation of domestic expertise and human capital. For long-term success, organised retailers should pursue a few key strategies. First, build capabilities and backend logistics infrastructure. Domestic firms should partner with established foreign firms to capitalise on combining foreign retail knowhow with domestic market knowledge. This is happening already. UK-based Tesco is working with the Tatas ; US-based Wal-Mart with Bharti, etc. Over time, these joint ventures will dissolve but both the domestic and foreign firms will have the capabilities to establish successful retail businesses independently .
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