FDI Retail Book

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InternationalisationCan Foreign Direct Investment

Redefine It In India?

of Retailing:

Dr. Dwarika Prasad Uniyal & Dr. Swagato Sarkar


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O.P. Jindal Global University (JGU) is a non-profit global university

established by the Haryana Private Universities (Second Amendment) Act,

2009. JGU is established in memory of Mr. O.P. Jindal as a philanthropic

initiative of Mr. Naveen Jindal, the Founding Chancellor. The University

Grants Commission has accorded its recognition to O.P. Jindal Global

University. The vision of JGU is to promote global courses, global

programmes, global curriculum, global research, global collaborations, and

global interaction through a global faculty. JGU is situated on a 70-acre state

of the art residential campus in the National Capital Region of Delhi. JGU is one of the few universities in

Asia that maintains a 1:15 faculty-student ratio and appoints faculty members from different parts of the

world with outstanding academic qualifications and experience. JGU has established four schools: Jindal

Global Law School, Jindal Global Business School, Jindal School of International Affairs and Jindal School

of Government and Public Policy.

www.jgu.edu.in

Jindal Global Business School (JGBS) began its first academicsession with an MBA programme in 2010. The vision of JGBS is to

impart global business education to uniquely equip students,

managers and professionals with the necessary knowledge,

acumen and skills to effectively tackle challenges faced by

transnational business and industry. JGBS offers a multi-

disciplinary global business education to foster academic excellence, industry partnerships and global

collaborations. JGBS faculty are engaged in research on current issues including: Applied Finance;

Corporate Governance & Applied Ethics; Digital Media & Communications; Emerging Economies &

Markets; Family Business & Wealth Creation; Social Entrepreneurship, Supply Chain & Logistics

Management; Infrastructure, Energy & Green Technologies; Innovative Leadership & Change; and

New Consumer Trends Studies. JGBS has established international collaborations with the Naveen JindalSchool of Management, University of Texas at Dallas, Kelley School of Business, and Carleton University.

www.jgbs.edu.in

Jindal School of Government and Public Policy (JSGP) promotes public policy

research that facilitates better understanding of issues related to governance

and public policy. The programmes at JSGP bear in mind the contribution that

the faculty and the students of the school can make towards meeting the

challenges of governance with a view to improving its efficiency drawing upon

comparative and international perspectives in public policy. MA in Public

Policy is an interdisciplinary degree programme that teaches the students to

delve into the contemporary issues in a coherent and holistic manner, to see

the linkages among various aspects of public policy and governance. JSGP has developed academic and

research collaborations with the School of Public and Environmental Affairs (SPEA) of Indiana University,

USA and the National Institute of Administrative Research (NIAR), LBS National Academy of

Administration, Mussoorie.

www.jsgp.edu.in


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Table of Contents

1

Acknowledgements .............................................................................................................................. 2

Executive Summary ............................................................................................................................ 3

Chapter 1 Introduction ........................................................................................................................... 5

Chapter 2 Conceptual Model for Retail Internationalisation and Its Impact.......................................... 8

Chapter 3 Impact of FDI in Other Developing Countries...................................................................... 10

Chapter 4 Cases of Failure of Retail Internationalisation ..................................................................... 13

Chapter 5 Overview of the Indian Retail Market .................................................................................. 18

Chapter 6 Existing Regulatory Frameworks and FDI Policy ................................................................ 23

Chapter 7Viewpoints for and against FDI in the Retail Sector.............................................................. 25

Chapter 8 Current Status and Other Perspectives on the Issue ............................................................. 28

Chapter 9 Conclusions and the Way Forward ...................................................................................... 30

Bibliography ........................................................................................................................................ 32


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We, the authors of this study, would like to acknowledge the contribution of many people without whom

this effort would not have been possible. First, we would like to thank Professor Aseem Prakash, who

joined us in organising the first workshop on 'FDI in the Retail Sector' in January 2012, and wasinstrumental in shaping the agenda both of this report as well as the conference. The broad framework of

the report had been suggested by Dr. Leigh Sparks, Institute for Retail Studies, Stirling University; we are

grateful to him for his comments and guidance.

We would also like to extend our thanks to the speakers of the workshop, notably, Dr. Arpita Mukherjee of

ICRIER, Professor T.S. Papola of ISID, Dr. Sukhpal Singh of IIM(A), Mr. Vishal Sehgal of Metro AG, Mr.

Prasenjit Bose, formerly with the CPI(M), and Mr. Gautam Mody of the New Trade Union Initiative. Their

deliberations during the workshop enabled us to grasp the multiple perspectives on this subject and to

develop a critical understanding of the issues.

We would like to acknowledge the contribution of the student research assistants for their commitment,

passion and hard work both during the organisation of the workshop as well as the compilation of thisreport. We would especially like to acknowledge the contribution of Lavanya Setia, Niyati Raj, Rohit Singh,

Varun Rai and Venkat Tushar of MBA-2, JGBS. Further, they would like to thank Dr. Michael J Barnes, Ex-

Dean, JGBS; Dr. D.N. Pandey, Vice Dean, JGBS; and Dr. Brajesh Kumar, and Dr. Prageet Aeron of JGBS for

offering valuable suggestions.

In addition, we would like to recognise the support of the faculty and administration at O.P. Jindal Global

University (JGU), especially of JGBS and JSGP, especially the support of the Registrar, Prof. Y.S.R Murthy,

Dr. Mamta Sharma, Mr. Rajendra Tiwari, and their graphic designers, Mr. Manoj G.D. and Mr. Dinesh

Gupta.

Last but not the least, we would like to thank the Vice Chancellor of JGU, Professor C. Raj Kumar for his

encouragement, support and guidance.

Dwarika Prasad Uniyal

Swagato Sarkar

Acknowledgments

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Executive Summary

The Indian retail sector has seen a gradual though steady metamorphosis over the last decade. Despite the

myriad advances over the years, the sector continues to remain highly fragmented; it is still primarily

dominated by the unorganised segment, reflected in the quintessential traditional family-run stores.

The entry of Foreign Direct Investment (FDI) in the retail sector has always been a contentious issue,

courtesy the well-documented proclivity of our policy-makers to dither and delay decision-making on keyaspects stemming from political risks at large. The retail FDI policy has been burning smoke every now and

then with the government trying hard to buy it off the shelves before it expires.

Political consideration is a real obstacle. Regional satraps oppose the liberalisation of policies, which might

lead to an increase in foreign investment. Since the Government is dependent on the support of these

outfits, it is forced to slow down the liberalisation of FDI policies. Also, despite the importance being

accorded to infrastructure by the Government, it still continues to be a reason for foreign investors to not

invest in India. India's roads continue to be among the worst in the world. Regular power cuts here remain

a way of life. The existing infrastructure projects often do not get adequate government support, leading to

the withdrawal of foreign investment. Enron faced such a situation when it pulled out of the Dabhol power

project, which had an FDI of $2.9 billion, while citing government opposition to the project.

India also needs to upgrade its labour laws to attract foreign investors, which in the long run, would also

prove beneficial for the labourers. The inflexible nature of labour laws often makes investors shy away from

India. Moreover, international reports on transparency accord a very low rank to India. A combination of

legal hurdles, lack of institutional reforms, bureaucratic decision-making and allegations of corruption at

the top have turned foreign investors away from India. In fact, in view of the manner in which India is

expanding and influencing the world after liberalisation, there is a need to improve lifestyles in India as

compared to other countries.

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The proponents of FDI in Multi Brand Retail Trade (MBRT) and Single Brand Retail Trade (SBRT) point

out that opening up of the retail sector is the single most important second-generation economic reform. It

would provide backward and forward linkages to agricultural/farm products, enable the farmers to obtain

better prices for their products, generate employment opportunities in both rural and urban areas, help

control spiralling food inflation, bring in the much required foreign capital, and contribute to the overall

growth of the economy.

Those in favour of FDI in retail offer the following arguments: It would reduce intermediaries between farmers and the retailers, thereby helping the former get

more money for their produce.

It would help in bringing down prices at the retail level and reduce inflation.

Big retail chains would invest in supply chains, which, in turn, would reduce wastage, currently

estimated to be 40 per cent in the case of fruits and vegetables.

Small and medium enterprises would be able to access a bigger market, along with better

technology and branding.

It would bring in much-needed foreign investment into the country, along with international

technology and global best-practices.

It would actually create employment rather than displace people engaged in small stores.

It would induce better competition in the market, thus benefiting both producers and consumers.

Those offering counter-arguments to these claims cite devastating experiences from countries that have

allowed FDI in retail. They point out that opening up of the retail sector would lead to the concentration

and centralisation of supply, resulting in price rise, and the destruction of livelihood opportunities of small

retailers, besides allowing foreign capital to earn an above-average margin.

Those against FDI thus argue that:

It would lead to the closure of tens of thousands of mom-and-pop shops across the country and

endanger the livelihood of 40 million people.

It may bring down prices initially, but would subsequently fuel inflation once multinationalcompanies gain a stronghold in the retail market.

Farmers may be given remunerative prices initially, but eventually they would be at the mercy of big

retailers.

Small and medium enterprises would become victims of the predatory pricing policies of

multinational retailers.

It would lead to the disintegration of established supply chains by encouraging the monopolies of

global retailers.

As with any other sector, the entry of foreign players into retail would introduce competition that would

benefit some while working to the detriment of others. The beneficiaries in this case are the Indian

consumers, especially the lower middle class, who would benefit from the well-paying jobs that would becreated, and the producers of goods, including farmers, who have been at the mercy of middlemen and

monopsony buyers and trader monopolies. As usual, the interests that are threatened by this move have

sought to portray it as being detrimental to India. At another time, it was said in the US that what was good

for [General Motors] was good for America. It took some time for that belief to lose its status as an

axiomatic truth. It is time that India too re-examined its axiomatic beliefs. After all, the East India

Company left India more than 100 years ago.

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5

Introduction

The US economy is struggling to expand and Europe is rapidly descending into recession. In these times of

tough financial situations, fast-growing markets in the developing world seem to offer the best

opportunities for boosting revenues and profits (Lal and Corstjens, 2012). It has to be noted that manymultinational corporations (MNCs) from the developed world have been keen to follow the progress of

organisations such as Boeing, Coca-Cola, Pepsi, P&G, Virgin, DuPont, General Electric, Nestle, Hewlett-

Packard, IBM, Oracle, Unilever, and Disney, which appear to have succeeded in becoming significant global

entities. However, the same logic cannot be applied to all industries, especially in retailing. Lal and Corstjens

found that in grocery retailing, the benefits of globalisation had not accrued to the retailers. It was found that

in contrast to other industries, grocery retail was still dominated by local players in most countries.

International players were either absent or had very little presence in the retail markets of the developing

world. Despite the challenges and past failures, retailers still strive to enter the developing markets for a

number of reasons like a quest for greater economies of scale and scope, a need to diversify risks, a desire to

attract fresh talent and create new opportunities for existing leaders, and a need to make up for the

constraints imposed by regulatory agencies when a retailer outfit becomes too big for its home market.

Retail internationalisation has become central to the future plans of many retailers, especially during the

last decades. At the same time, funding of retail businesses has become international as large firms raise

finance for developments, and call for funds, from the international financial institutions. It has to be

noted, however, that despite the rapid growth of retail operations across countries, almost every big retailer

has experienced failure abroad: Wal-Mart succeeded in Canada and Mexico but failed in Germany and

South Korea; Tesco gained significant market shares in South Korea and Malaysia but failed to establish a

Chapter 1 : Introduction


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presence in France or Taiwan. In this context, it has become extremely important to understand and

systematically study the reasons behind Retail Internationalisation (RI) and the challenges that retailers

face in new markets. Since the economies of Europe and the US have been witnessing slow growth, like

many transnational or multinational companies, retailers now see Asian or Latin American markets in

terms of a huge opportunity for their growth. However, it must be noted that unlike manufacturing, retail

remains a local business and in many of the developing markets, local retailers still dominate the market.

Global retailers in developing markets are confronted with many challenges, such as the prevalence ofcomplex political structures leading to stringent government regulations and policies, which do not always

favour FDI in this sector, with India being a case in point. The other challenges included the lack of a proper

supply chain and cold chain infrastructure, problems of quality in sourcing from local vendors, the use of

unique trade practices, and opposition from local small retailers and political parties. Retailers also have to

deal with the lack of skilled manpower, inconsistent agricultural produce, various cultural and

geographical challenges, and last but not the least, coordination problems with the parent organisation.

Retailers are found to be involved in a variety of international activities (Dawson, 1994). The international

sourcing of products is one of the key functions of retailers who bring together assortments from many

sources. However, these phenomena are not new; there has been a history of international retailoperations. In the late nineteenth century Lipton stores operated in the US, Canada, Australia, Ceylon,

South Africa and Germany (Mathias, 1967). Julius Meinl of Vienna was founded as a grocery retailer in

1862 and by 1939, it had stores in Germany, Poland, the former Czechoslovakia, Hungary, the former

Yugoslavia, Romania, Bulgaria and Italy.

During the first half of the twentieth century, several American retailers moved into South American and

European countries, most notably Sears and Roebuck, which had 53 stores in Latin America by 1957 (Wood

and Keyser, 1953; Fritsch, 1962; Truitt, 1984) and FW Woolworth, which entered Canada in 1907, the UK in

1909, Germany in 1926, Mexico in 1954, and Spain in 1965. Retail internationalisation has received

significant attention by scholars in recent years (Sparks, 1995).

The key questions asked by Brown and Burt (1992) in a special issue of theEuropean Journal of Marketing

were:

Retail internationalisationhas otherwise been a subject of academic study since the 1960s and can be

studied from the early reviews of European (Knee, 1966) and American activities (Yoshino, 1966), and later

studies by Carson (1967) and Hollander (1970). The experimental moves of European retailers were

considered by Dawson (1978) and Waldman (1978). The attempts by American retailers to help in the

modernisation of retailing in developing countries were considered by Goldman (1974a; 1974b), while the

European adventures of American retailers were considered by Kacker (1985). However, the research on

international retail activity has been dominated by empirical studies and lacks an adequate conceptual andtheoretical framework (Dawson, 1994). In a general consideration of FDI, irrespective of the sector,

Dunning (1981; 1988) suggested that the following three factors are important in establishing whether a

firm develops direct investment in international operations:

Ownership-specific advantages, in which the firm has an innovative product, process or business

method, which imparts a competitive advantage to the firm in the market;

History of Internationalisation of Retail Business

What exactly is meant by retail internationalization? What do retailers actually internationalize? Is it

management expertise and management systems? Innovative forms of trading? Or Unique retail

brands?

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Location-specific advantages, in which the potential host country has particular cost advantages or

market opportunities that are not present in the home country; and

Internalisation advantages, in which the organisation of the firm or some environmental factor

results in ownership and location advantages that can only be realised through FDI.

Dunning's three factors approach, and other work (Kojima, 1982), provide a possible framework for

considering the internationalisation of retail operations, but perhaps more importantly, they serve to

highlight the considerable differences between FDI decisions in the retailing and manufacturing sectors,

and even between the organisation and management of firms in the two sectors (Pellegrini, 1992).

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Conceptual Model for Retail Internationalisation and Its Impact

The process involving retail internationalisation is complex. Dawson (2003, p. 4) proposes a four-phase

model to describe the complex process, including stability, consolidation, control, and dominance.

Initially, there is considerable fluidity, as the firm gains an understanding about the new market. During

the second phase, the firm adjusts to new conditions, while consolidating its position. After that, it begins to

try to exert control over the vertical and horizontal channel relationships.

When the retailer becomes established in the market, he applies mature strategies seeking market

dominance, similar to those used in the home country. Dawson (2003) also points out that few firms pass

through the complete model. Many firms fail to achieve their objectives and, therefore, decide to withdraw

from the market at some stage. Dawson and Mukoyama (2006) and Dawson (2007) argue that retailing has

unique features, which is why one has to study the impact of retail internationalisation from various

perspectives. The theoretical model proposes that retail internationalisation in a particular country would

bring changes in the social cultural values among customers while also eliciting a reaction from national

and international agencies engaged in public policy.

Retail internationalisation would impact the effectiveness of the existing demand chains and subsequently

bring changes in the competitiveness of the sector in the host country. At a firm level, this phenomenon

would impact profitability, bring about changes in the cost functions and generate new managerial

knowledge, while at the consumer level, it would help increase literacy through a better understanding of

marketing, and provide new solutions and wider product knowledge to the consumers.

Chapter 2 :

Retail Internationalisation and Its Impact

Conceptual Model for

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Conceptual Model: Impact of Retail Internationalisation:Dawson and Mukoyama 2006

Innovation in competitive activityAdditional investment

Improved productivity of assetsCatalyst for sectoral restructuringNew competitive behaviours

Changes in theeffectiveness ofdemand chains

Changes in sectoralcompetitiveness

Impacts of RetailInternationalisation

Loss of oldvaluesTransferof culture

Changesin socio-cultural

values

Public policyreaction ofnationaland internationalagencies

Limits onownershipBarriersto entryLimits oncorporate

behaviour

Performance ofthe firm

Increasedconsumer literacy

Innovation affecting channel structureNew relationships in the chain

Changes in behaviour in the chainNew functions introduced into the channel

Innovation affecting channel structureNew relationships in the chainChanges in behaviour in the chainNew functions introduced into the channel

Innovation affecting channel structureNew relationships in the chainChanges in behaviour in the chainNew functions introduced into the channel

Conceptual Model: Impact of Retail Internationalisation: Dawson and Mukoyama, 2006

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10

Chapter 3 : Impact of FDI in Other Developing Countries

Impact of FDI in Other Developing Countries

CHINA

FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without

limits on equity participation, while Malaysia has equity caps on FDI in the retail sector.

According to a FICCIICICI report, FDI in retailing was permitted in China for the first time in 1992.

Foreign retailers were initially permitted to trade only in six provinces and Special Economic Zones

(SEZs). Foreign ownership was initially restricted to 49 per cent. Foreign ownership restrictions have

progressively been lifted and, and following China's accession to the World Trade Organisation (WTO),

effective December 2004, there are no equity restrictions. 'Wholesale and retail projects' form part of the

Catalogue for Encouraged Foreign Investment Industries Employment in the retail and wholesale trade

increased from about 4 per cent of the total labour force in 1992 to about 7 per cent in 2001. The number of

traditional retailers also increased by around 30 per cent between 1996 and 2001. In 2006, the total retail

sale in China amounted to US$ 785 billion, of which the share of organised retail amounted to 20 per cent

(ICRIER, 2008). Some of the changes that have occurred in China, following the liberalisation of its retail

sector, include the setting up of over 600 hypermarkets, which were opened between 1996 and 2001. The

number of small outlets (equivalent to 'kiranas' in India) increased from 1.9 million to over 2.5 million

during this period. Employment in the retail and wholesale sectors increased from 28 million people to

54 million people from 1992 to 2001. China is witnessing robust economic growth, and increasing urban

and rural incomes are fuelling consumption levels in this vast and complex retail environment. China's

promising consumer market has led to a huge foreign interest. The influx of FDI in the country's retail and

wholesale trade climbed in 2007. There were 6,338 new foreign retail and wholesale enterprises in 2007,

up by 35.9 per cent year-on-year. The actual utilised FDI value amounted to US$ 2.68 billion, up by 49.6


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per cent. China's retail and wholesale trade sector has thus witnessed impressive growth in FDI, among

other things.

Thailand is frequently referred to as a country in which FDI had an adverse effect on the local retailers. It

permits 100 per cent foreign equity, with no limit on the number of outlets. For the retail business, it has a

capital requirement of Thai Bhat (TBH) 100 million and TBH 20 million for each additional outlet, while it

has a capital requirement of TBH 100 million for each wholesale outlet. Wet market and small family-ownedgrocery stores have dominated the Thai retail industry. Modern retail outlets set up by local Thai people came

to prominence during the economic boom in the early 1990s. Prior to 1997, no foreign investment was

allowed in the country and hence the retail sector faced limited competition, which is why it had few

incentives to upgrade operations. With the onset of the Asian crisis in 1997, the entry ban on foreign players

was removed. Within a short span of time, the foreign players expanded their operations significantly and

marginalised the local retailers, who were already suffering from a recessionary trend of economy. Many local

players had to close down their businesses. The entry of foreign players in a recessionary economy adversely

impacted all segments, including wholesalers, manufacturers and domestic retailers, in the short run.

However, the entry of foreign players also had certain positive effects such as:

It led to the development of organised retailing and Thailand has now become an importantshopping destination.

It encouraged the growth of the agro-food processing industry and enhanced the exports of Thai-

made goods through the networks of foreign retailers.

The Russian supermarket revolution occurred only in the 2000s. It is still a fragmented sector in a country

with a population of 140 million. Very high growth rates have, however, been recorded in the country. In

2002, sales by the top-15 chains totalled US$ 2.7 billion; by 2006, sales by those chains had soared to US$

19.2 billion. The share of the top three chains was 40 per cent in 2002, and 54 per cent in 2006, with the

lead domestic chains acquiring many small regional and local chains. The foreign share of sales was 33 per

cent in 2002 and 35 per cent in 2006only inching up and spreading over eight foreign chains among the

top 15. The two largest companies are Russian, but the origin of the capital, even in the Russian companies,

is usually a mix of domestic and foreign.

The Chilean supermarket sector is a case of a take-off driven by domestic capital, followed by nascent multi-

nationalisation, followed by abrupt 'de-multi-nationalisation'. The supermarket sector in Chile was

launched in the 1990s, with the backing of domestic capital. Late in the 1990s, the global chains ranked

number two and number three respectively, Carrefour and Ahold, entered the country.. By 2002, these two

companies accounted for 13 per cent of the total sales of US$ 4.6 billion recorded by the top eight chains.

However, by 2006, their share had plummeted to zero per cent of the total sales of US$ 12.6 billion of the

top eight companies (growing at a pace similar to China's); the Chilean subsidiaries of two foreign chainshad been bought by the top-two Chilean chains in 2003. Today those top two chains account for 65 per cent

of the market. The three market leaders, all of which are domestic players, are expanding rapidly into other

Latin American countries through mergers and acquisitions, thus becoming regional multinationals. The

domestic capital was based in a combination of domestic bank credit and real estate, commercial and

financial services. These were the tertiary sector ripple effects of the fundamental boom in copper and wood

products, and the fruit and fish boom.

THAILAND

CHILE

RUSSIA

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12

INDONESIA

Indonesia permits 100 per cent foreign equity in retail business, with no limit on the number of outlets. It

also does not impose any capital requirements. The take-off of modern retail in Indonesia in the 1990s

primarily involved domestic chains. The current leading chain, Matahari, is indicative of this trend.

Matahari started as a small shop in 1958, grew into a chain of department stores, and was then purchased

by a giant banking and real estate conglomerate, Lippo Group, in 1997, just before the advent of the Asian

economic crisis. The crisis created a sharp dip in modern retail sales, which began recovering in the 2000s.

Matahari doubled its sales between 2002 and 2006, becoming a billion-dollar chain by 2006. The share of

foreign chains (including one European and one Hong Kong) in the top seven chains is now 40 per cent.

However, because the sector is still fragmented, foreign chains do not have more than a 20 per cent share,

which is similar to the situation in China.


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Chapter 4 : Cases of Failure of Retail Internationalisation

Cases of Failure of Retail Internationalisation

WAL-MART

According to a study by Ryu and Simpson (2011), the most well-known and researched case of retail failure

deals with the world's largest retailer, Wal-Mart. Known for its dominance in global sourcing, which

accounts for 10 per cent of the US trade deficit with China (Workman, 2006), the company has struggled to

compete in the global retail market, often in markets with social cultures that conflict with the success that

Wal-Mart has experienced in the domestic market. Their failure and withdrawal of Wal-Mart from the

German market is particularly well-documented (Christopherson, 2007; Davison and Burt, 2006; Fernie

and Arnold, 2002; Gerhard and Hahn, 2005; Workman, 2006; Zimmerman, et al., 2006; Heading for the

Exit, 2006). Wal-Mart entered Germany at the end of 1997 with the purchase of 21 existing Westkauf

stores and shortly thereafter of 74 Interspar hypermarkets. With the company known for its preference for

acquiring existing companies that can be moulded into the existing corporate structure (Fernie and Arnold,

2002), its purchase of two existing German retailers was not unusual even though it gave Wal-Mart only a 3

per cent share in the German retail market sector (Davison and Burt, 2006). Many of the stores purchased

were also outside of town centres, and were thus frequented less by German consumers.

As the largest retail market in Europe, and with its central location ideal for future expansion in all

directions within Europe, Germany looked like an ideal starting point for Wal-Mart in Europe (Gerhard

and Hahn, 2005). However, Germany is also the most competitive European market with strong and well-

established hard discounters, heavy government regulations, and strong workers' unions (Davison and

Burt, 2006). The factors which harmed Wal-Mart in Germany included their inability to compete on price

in the already heavily discounted German market. Known for offering 'everyday low prices' in the United

States, Wal-Mart did not hold a price advantage in Germany where companies already operate on

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extremely low profit margins and where customers are accustomed to a wide selection of heavily

discounted items. Although wholly owned, Wal-Mart was unable to capitalise on that level of control to

their advantage. It faced negative factors immediately upon entry into the market.

Since most of its German competitors were privately owned and thus less acquirable, Wal-Mart was left to

purchase the smaller, available retailers many of whose stores were in need of renovation. A delay on Wal-

Mart's part to get their name on new stores, and then to renovate them to represent the Wal-Mart brand

well, resulted in an almost immediate negative association with image for the brand. Wal-Mart was thusnever able to achieve status as a significant brand in Germany (Halepete, et al., 2008). Wal-Mart also erred

in misreading the German people's expectations with regard to customer service. The company's friendly

sales staff approach was not well received by German consumers, who found the behaviour of the smiling

sales staff disconcerting (Workman, 2006). Due to the long travel distance to stores that were located

outside of local shopping districts, most German customers relied on Wal-Mart for monthly purchases

rather than their regular weekly and thus main shopping purchases (Gerhard and Hahn, 2005). Wal-Mart

is generally considered to have two areas of organisational advantage over its competitors: (a) control over

suppliers which affects cost, storage and distribution time, and (b) the technological ability to move rapidly

with market changes, which normally help Wal-Mart achieve a cost advantage over its competitors across a

very wide range of products. Unable to achieve the same level of control over German suppliers,

distribution channels, and employees, as it experiences in other markets, Wal-Mart was unable to gain

significant advantages over its German competitors (Christopherson, 2007). Wal-Mart was also unable to

adjust to the social norms of a German labour force, including assigning of a director over German labour

interests who spoke no German (Heading for the Exit, 2006). The German labour movement is

accustomed to direct involvement in company decisions. By not adequately including employees' unions in

every step of company practices, Wal-Mart lost the support of its employees and subsequently of the

general public, which places a high value on the involvement of labour in corporate affairs.

In July 2006, Wal-Mart sold its 85 German stores to the powerful German retailer, Metro AG. Wal-Mart

also experienced a textbook-like case of failure in the South Korean market. Forming a joint venture in

1998, Wal-Mart operated 16 stores in South Korea. As in the German market, South Korean consumers

found the warehouse style retailing at Wal-Mart unfriendly and housewives felt that the selection of food

and beverages it offered did not meet the needs of Korean families (Workman, 2006). Wal-Mart failed to

adequately adapt to these differences in taste. In addition, they were unable to gain network advantages

over their competitors, a key to Wal-Mart's success in other markets.

With only 16 stores in the market, Wal-Mart Vice Chairman Michael Duke noted,

Wal-Mart also lacked a diversification of investment in their joint venture arrangement within South

Korea. A country dominated by family-controlled conglomerates with interests in manufacturing,

retailing, and real estate, Wal-Mart was challenged to compete against these conglomerates that had strong

control over sourcing, costs, distribution and store locations. As in Germany, Wal-Mart was unable to

achieve its successful, competitive advantage of control over suppliers and technological advantages in

terms of distribution and market adjustment. Price wars were common, as domestic retailers earnestly metWal-Mart's efforts to lower prices (Halepet,et al., 2008). Wal-Mart consistently ranked fifth among the top

five retailers in South Korea (Wal-Mart Sells Korean Business, 2006). In May 2006, Wal-Mart sold its 16

stores to South Korea's largest discount retailer, E-Mart, owned by Shinsegae.

Competing in highly developed markets has also proven to be a challenge for France's number one retailer,

Carrefour. Entering the Japanese market in 2000 with eight stores, Carrefour was significant as the first

it became increasingly clear it would be difficult for us to reach the scale we desired(Workman, 2006).

CARREFOUR

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greenfield wholly owned international entrant (Aoyama, 2007). Like Wal-Mart in Japan, Carrefour

experienced aggressive price competition from existing domestic retailers. Japan has one of the world's

strongest luxury brand markets, with few low-income households, which results in a smaller market for

discounted items. Upon entry to the market, consumers anticipated that Carrefour would represent luxury

French products for which there was a demand. Instead, Carrefour followed its internationally successful

strategy of working with local suppliers for goods that were common to the local market. Unfortunately, the

market for local products was saturated, and thus Carrefour held no advantage over established retailers.

Although the company attempted to adjust by bringing in French wine and other food products, the initialdamage was too great to enable it to overcome its failure to achieve enough of the market share for

remaining viable (Baek, 2004). Carrefour also miscalculated the desire for service and appearance to the

Japanese consumer. By instituting statement merchandising, Carrefour sacrificed store appearance for

shelved product maximisation. Aoyama (2007) suggests that Japanese consumers are relatively price-

insensitive and value a fashionable store atmosphere and location, as well as higher customer service, over

lower prices.

Japanese consumers tend to be extremely brand conscious, even on everyday products and food. They

regularly associate low price with cheap quality and instead prefer retailers who provide entertaining

shopping experiences and products that enrich their lives (Aoyama, 2007). While Japanese consumers do

monitor pricing, in this highly developed market where domestic retailers are able to establish prices that

are equal to or lower than those of international retailers, Carrefour was unable to achieve any competitiveadvantage on pricing. Carrefour also faced challenges relating to distribution and location within Japan.

Without that advantage, and by not meeting consumer's expectations, Carrefour was unable to achieve an

economy of scale that was large enough to compete in the market. Carrefour split its store locations

between Osaka and Tokyo, which resulted in neither location achieving a strong market share. The

distribution systems in Japan are notably complex to outsiders (Aoyama, 2007), involving layer upon layer

of difficult to track wholesalers, manufacturers, and transportation companies. Accustomed to direct

distribution from manufacturers, and faced with unwillingness on the part of distributors to adapt to a

fairly weak retailer, Carrefour was unable to gain its usual advantage over competitors in its distribution

channels. In March 2005, Carrefour sold its eight brand new stores to Japan's number one retailer Aeon.

Carrefour had faced similar difficulties on a smaller scale in the American market, when it entered with

stores in Philadelphia in 1988. As in Japan, it entered a well-established, consumer-relevant market. At thetime of its entry, many of the innovations of Carrefour's hypermarket format were not unique or significant

to American consumers (Dupuis and Prime, 1996). Large-scale parking lots were not uncommon and

established retailers such as Wal-Mart and Kmart were already providing items at discounted prices to

consumers. At the time, the American market had also not yet adapted to the concept of purchasing food

items and non-food items at the same store. As it would later experience in Japan, apparently unable to

learn from its experiences in the US market, Carrefour was unable to achieve a large enough economy of

scale to affect purchasing price and consequently significantly boost its ability to compete in the market.

Similar to Wal-Mart's experience in Germany, Carrefour also faced employee union resistance, which

directly resulted in negative public opinions towards the company brand. As it would do in Japan almost a

decade later, Carrefour closed its US operations in late 1993 (Carrefour Makes Plans, 1993).

British retailer Tesco has experienced market failure and exit as a result of errors in market entry decisions.

In the late 1970s, Tesco initially purchased a food retailer as a way into the retail market in Ireland. By

treating the market as an extension of its UK operations, it showed neglect in adapting to local Irish tastes

and suppliers, which resulted in a general distrust on the part of the local consumers due to the fact that few

Irish products were offered for sale (Palmer, 2004). Like Wal-Mart would do in Germany, Tesco also made

a poor choice in its wholly-owned purchase, as the stores it acquired were mostly situated in poor, less

TESCO

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densely populated locations that were not well suited for Tesco's products. Tesco sold its stores to an Irish

supermarket chain in 1986. Interestingly, Tesco re-entered the Irish market in 1997 with the purchase of

another food retailer, this time securing the position as the largest food retailer in Ireland with 109 stores.

Although initially cautious to not repeat errors that led to customers distrusting the Tesco brand, the

company again failed to meet customers' expectations. Legal problems concerning the dress code of female

employees and a revelation that the company was regularly overcharging customers in error and not fully

refunding the charges created new distrust for Tesco on the part of the Irish consumers (Palmer, 2004).

Learning from previous mistakes and with the scale surpassing all other Irish food retailers, Tesco adopted

a 'buy Irish' campaign to improve its image, and currently over half of the products sold in its Irish stores are

Irish-made or grown. It purchases Irish products worth over 650 million each year for export to its global

stores (Tesco, PLC, 2008). In 1992, Tesco attempted entry into the French market with the purchase of 85

per cent of a small regional chain, in the hope of expanding it into a nation-wide brand. Hindered by a

downturn in the market and concern across Europe as Wal-Mart entered Germany while Carrefour and

Casino expanded, Tesco was handicapped by its lack of experience in global markets. Ultimately, it became

apparent that the amount of effort needed from the domestic office to sustain the French market exceeded

the profits returned to the company, and Tesco chose to divest from the market to focus its attention on the

more profitable domestic and international markets (Palmer, 2004). Yet, as an example of the need for

retailers to plan for divestment in conjunction with market entry strategy, it took three years for Tesco tolocate a suitable purchaser for its French stores, finally selling the chain of 90 stores to Promodes in 1997.

Retailer Country Years in Factors for Exit

of Entry the Market

Germany 9 Poor Entry Strategy: Wholly owned instead of joint

venture

Wal-Mart Inward Focus: Prevented market adaptation

South Korea 8 Poor Entry Strategy : Weak joint ventureInward Focus: Prevented market adaptation

Japan 5 Poor Entry Strategy: Split locations for loss distribution advantages

Inward Focus: Prevented market adaptation and misplaced

Carrefour confidence in strategy

USA 5 Poor Global Strategy: Not innovative in the US marketplace

Inward Focus: Unable to adapt to US consumers

Ireland* 8 Poor Entry Strategy: failed selection of wholly owned stores

Tesco Inward Focus: unable to adapt to Irish Versus UK consumers

France 5 Inward Focus: Lack of experience for market adaptationand lack of global strategy

Responsible

*Market re-entered in 1997 and remains to date

(Adapted from: Ryu and Simpson, 2011: Retail internationalisation: Lessons from Big Three globalretailers' failure cases, Journal of Business and Retail Management)

Table 4.1: Summary of Selected Cases of Failure

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Retailer Internationalisation in the Asian Context

The expansion of retailers beyond their domestic markets is a major feature of twenty-first century

commerce (Dawson and Lee, 2004). Whilst the international operation of retailers has a long history, there

has been a surge in such an activity over the last two decades. International activity has become a significant

element of strategy for many of the world's large retailers. From being a peripheral aspect of retailer

strategy, international activity has become much more important to the continuing growth of retailers. The

moves of major retailers from both Europe and USA into Asia and the international moves within Asia oflarge Asia-based retailers since the late 1990s has introduced a new dimension into the concept of the

global spread of retailing. The gradual relaxation of governmental constraints on development in China is

providing a similar stimulus for retailers to that of the privatisation of Central Europe during the post-1989

period.

The issues that are now coming to the fore not only replicate the experiences of Europe and North America,

but are also new and particular to the retail cultures present in Asia. The contrasts in retail culture within

Asia are greater than within Europe or North America. Retailers entering Asia are, therefore, faced with not

only a consumer and retail culture that is very different from their own but also issues that are very

different, depending on the country of entry. Retail internationalisation in Asia is generating new

managerial and academic issues that have not been previously addressed by managers or academics.

Two decades of economic reform have nurtured an affluent consumer market in China, and the size of the

consumer market has continued to grow during the last five years. Within the globalising economy, China is

the new frontier for much of international business, and the country offers itself as both a major source of

cheap labour and as a market of mass consumption. Foreign retailers began to enter China 16 years ago in

1992. Since then, many of them have established a firm presence in the largest emerging market in the

world. Nonetheless, the Chinese market has not been easy to penetrate, and from the beginning, foreign

retailers have encountered a variety of difficulties there. Indeed, when China first opened its consumer

market to foreign retailers, there were high threshold barriers to the inflow of foreign retail capital. The

earlier patterns of entry and expansion of foreign retailers were documented in a 2003 study by Wang

(2003).

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Chapter 5 : Overview of the Indian Retail Market

Overview of the Indian Retail MarketAlthough substantial work has been done on the internationalisation of retail formats across Europe andfrom Europe to USA and vice versa, scholars have paid little enough attention to the developing countries,particularly the BRIC nations (Brazil, Russia, India and China). During the last ten years, these economies

have outperformed all others in terms of GDP growth and thus attracted the attention of internationalretailers for investing in these countries. In China, especially since the turn of the century, it becameincreasingly essential to understand the markets and the impacts of FDI. There is a need to studydeveloping markets through comparative research test models and to put together theoretical frameworksthat are applicable in this wider context. During the last few years, many European and American retailershave been trying to enter India, hence it becomes all the more important to learn the peculiarities of theIndian marketplace, the economy, the politics of policy-making and the impact of FDI on various interestgroups, including small 'mom and pop' stores, national retailers, and farmers.

According to theFICCIIndustry Report 2011, the Indian retail industry has experienced a high degree ofgrowth over the last decade with a noticeable shift towards organised retailing formats. The industry ismoving towards a modern concept of retailing. The size of India's retail market was estimated at US$ 435

billion in 2010. Of this, US$ 414 billion (that is, 95 per cent of the market) comprised traditional retail while

US$ 21 billion (that is, 5 per cent of the market) comprised organised retail. India's retail market is expectedto grow at the rate of 7 per cent over the next 10 years, reaching a size of US$ 850 billion by 2020.Traditional retail is expected to grow at the rate of 5 per cent and reach a size of US$ 650 billion (accountingfor 76 per cent of the market), while organised retail is expected to grow at the rate of 25 per cent and reach asize of US$ 200 billion by 2020. The US-based global management consulting firm, A.T. Kearney, in itsGlobal Retail Development Index (GRDI) 2011, has ranked India as the fourth most attractive nation forretail investment, among 30 emerging markets. Retail is the largest private sector in the country and in2009-10, its share in the GDP was around 8.1 per cent. Food and grocery constitutes the largest retail

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segment (accounting for a 50 per cent share), followed by healthcare, apparel and home textiles, andhousing. India also has the highest retail outlet density in the world, that is, it has 15 million outlets, but atthe same time only 4 per cent of these are larger than 500 square feet. According to the latest NationalSample Survey (NSS), 44 million people are employed in the retail sector in India.

Some of the key players in the Indian retail market, with a dominant share are:

1) Pantaloon Retail Ltd., (a Future group venture): Has over 12 million sq. ft. of retail space spread over1,000 stores, across 71 cities in India.

2) Shoppers Stop Ltd.: Hasover 1.82 million sq. ft. of retail space spread over 35 stores in 15 cities.

3) Spencer's Retail, RPG Enterprises:Has retail footage of over 1.1 million sq. ft., with approximately 250stores across 66 cities.

4) Lifestyle Retail (Landmark group venture): Has approximately 15 lifestyle stores and 8 Home centres.

Other major domestic players in India are Bharti Retail, Tata Trent, Globus, Aditya Birla 'More', and

Reliance Retail.

Some of the major foreign players who have entered the segment in India are:

1) Carrefour, which has opened its first cash-and-carry store in India in New Delhi.

2) The Germany-based Metro Cash and Carry,which opened six wholesale centres in the country.

3) Wal-Mart,in a joint venture with Bharti Retail, is the owner of Easy Day Stores, and it plans to investabout US$ 2.5 billion over the next five years to add about 10 million sq. ft. of retail space in the country.

4) British retailer Tesco Plc (TSCO)signed an agreement in 2008 with Trent Ltd., the retail arm of India'sTata Group, to set up cash-and-carry stores.

A study of the top 250 retailers reveals that 110 of them operate in a single local home country. Of these, 175retailers operate in less than five countries, mainly neighbouring ones. Only 50 retailers operate in morethan 10 countries. It has been observed that 36 MNC retailers have entered into China after the late 1990'sand out of these, 50 per cent (17) are already present in India as detailed in the following table:

Presence of MNC Retailers in India and China

S. Retail

No. Sales of Origin Retail Number of

Rank Sales Countries

(US$ Billions)

1 1 Wal-Mart Inc. USA 405.05 16 Yes Yes

2 2 Carrefour SA France 119.88 36 Yes No

3 3 Metro AG Germany 90.85 33 Yes Yes

4 4 Tesco Plc UK 90.43 13 Yes No

5 15 Groupe AuchanSA France 54.057 14 Yes No

6 16 Seven and i Holdings Co. Japan 52.508 18 Yes No

7 17 Best Buy Co. Inc. USA 49.694 15 Yes No

8 18 Aeon Co. Ltd. Japan 49.021 9 Yes No

9 30 The IKEA Group Sweden 29.100 38 Yes No

10 44 PPR SA France 18.714 84 Yes Yes

11 48 Alimentation Couche-Tard Canada 16.440 9 Yes No

Company Country 2009 Present in China India

Table 5.1: Details of Retailers in India and China

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12 50 Inditex S.A. Spain 15.424 74 Yes Yes

13 52 Kingfisher Plc UK 15.381 8 Yes No

14 53 Marks & Spencer UK 15.224 39 Yes Yes

15 55 A.S. Watson and Hong 14.977 34 Yes No

Company Ltd. Kong SAR

16 57 Staples Inc USA 14.635 23 Yes Yes

17 60 Groupe Adeo France 13.807 9 Yes No

18 61 Isetan Mitsukoshi Japan 13.575 11 Yes No

19 62 Toys"R"Us.Inc. USA 13.568 35 Yes No

20 64 H&M Hennes & Mauritz AB Sweden 13.218 36 Yes No

21 67 LVMH Moet Hennessy France 12.843 79 Yes Yes

22 73 Dell Inc. USA 12.054 177 Yes Yes

23 96 Lotte Shopping Co. S. Korea 8.823 5 Yes No

24 101 Office Depot, Inc. USA 8.661 33 Yes No

25 102 Limited Brands, Inc. USA 8.632 45 Yes Yes

26 116 Oxylane Groupe France 7.587 14 Yes Yes

27 124 Fast Retailing Co. Ltd. Japan 7.118 19 Yes No

28 125 Dairy Farm International Hong 7.029 10 Yes Yes

Kong SAR

29 133 Apple Inc. /Apple Stores USA 6.574 9 Yes Yes

30 158 Next plc UK 5.074 32 Yes Yes

31 179 Luxottica Group S.P.A Italy 4.378 25 Yes Yes32 193 Groupe Vivarte France 4.020 66 Yes No

33 223 Compagnie Financiere Switzerland 3.372 51 Yes Yes

34 230 Lagardere Services SA France 3.226 30 Yes No

35 238 Coach, Inc. USA 3.156 6 Yes No

36 248 Woolworths Holdings S. Africa 3.093 18 No Yes

(Source: Store Magazine, January, 2011)

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Old Format

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New Format

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Chapter 6 : Existing Regulatory Frameworks and FDI Policy

Existing Regulatory Frameworks and FDI Policy

Policy Revisions

In India,retail is a state subject and FDI is under the Department of Industrial Promotion and Policy

(DIPP), Ministry of Commerce and Industry; the shop opening timings are governed by the Shops and

Establishment Act (State Act) and the 'zoning' is regulated by the local municipal bodies. In 2006, FDI up to

100 per cent was allowed through automatic route for cash and carry (C&C) wholesale trading and exporttrading. In April 2010, the Government announced that sales of a C&C outlet to a group of business entities

should not exceed 25 per cent of a C&C company's turnover. During the same year, FDI up to 51 per cent was

allowed in single-brand retail, subject to some conditions. Before 2006, FDI up to 100 per cent with

Foreign Investment Promotion Board (FIPB) approval was allowed for trading of items sourced from the

small-scale sector, test marketing, trading of items for the social sector, trading of hi-tech, medical and

diagnostic items, and domestic sourcing of products for exports subject to the provision of the EXIM

(Export Import) Policy. However, FDI up to 100 per cent is permitted for B2B e-commerce activities, direct

marketing and in the Franchising and Commission Agents services, with the approval of the Reserve Bank

of India (RBI).

With effect from 10 January 2012, 100 per cent FDI is allowed in single-brand retail subject to the

following conditions for FIPB approval:

Only single brand products can be sold (that is, retailing of goods of multi-brand even if produced by

the same manufacturer would will not be allowed).

Products should be sold under the same brand internationally.

Single brand product retailing covers only products that are branded during manufacturing.

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In Favour of FDI Against FDI

and skill development

Would lead to the inflow of technology Anti-competitive practicesmalpracticesdue to buying power, predatory pricing, etc.;

Would streamline the supply chain, bringing Loss in employment;about efficiencies in distribution andelimination of middlemen;

Would lead to a spurt in productivity and Lack of formal contractsreductionremove supply side constraints; in risk-sharing with farmers

Would help develop front-end and back-endretail operations;

Would facilitate respectable working conditions

Would ensure lower prices for consumers

Would contribute to brand building

Any addition to product categories to be sold under the single brand would require fresh approval

from the Government.

The foreign investor should be the owner of the brand.

For FDI beyond 51 per cent, 30 per cent sourcing from small and medium scale enterprises (SMEs)

would be mandatory.

The Cabinet also proposed allowing FDI up to 50 per cent in the multi-brand retail sector, subject to thefollowing conditions:

The minimum foreign investment should be US $100 million.

At least 50 per cent of the total FDI should be invested in 'backend infrastructure'.

At least 30 per cent of the goods should be procured from SMEs.

Foreign retailers can establish their presence only in cities with a population of more than 10 lakh as

per the 2011 Census and may also cover an area of 10 km around the municipal/urban

agglomeration limits of such cities.

The Government would have the first right to procurement of agricultural products.

The proponents of FDI in MBRT and SBRT point out that opening up of the retail sector is the single most

important second-generation economic reform. It would provide backward and forward linkages to

agricultural/farm products, enable the farmers to obtain better prices for their products, generate

employment opportunities in both rural and urban areas, help control spiralling food inflation, bring in the

much required foreign capital and contribute to the overall growth of the economy.

Those offering counter-arguments to these claims cite the devastating experiences of countries that had

allowed FDI in retail. It is pointed out that opening up of the retail sector would lead to the concentration

and centralisation of supply, resulting in price rise and the destruction of livelihood opportunities for small

retailers, while allowing foreign capital to earn an above-average margin.

The Current Debate

Table 6.1: Different Views on FDI in Retail

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Chapter 7 : Viewpoints for and against FDI in the Retail Sector

Viewpoints for and against FDI in the Retail Sector

The Necessity of FDI in the Retail Sector

According to Professor Arpita Mukherjee of ICRIER, the retail sector could itself have decided to go

aggressive two decades earlier. The hurdles in doing so have chiefly been the dismissive attitude towards

this sector as a career option. People in India nurture a mentality that selling products at shops is the last

option for survival. The basic perception of a marketing person among his neighbours is that he sells soaps

and shampoos. They do not realise that the retail sector is the largest employment provider in the country,

ahead even of the Indian Railways and the Indian Army. And it is a dire need, on behalf of both the

companies and the Government to change this perspective substantially. The brands available in India

have had a lethargic approach towards making branding, marketing and retailing as one of the most

desirable jobs in the subcontinent. They caught up with the euphoria in post-2000, substantiated by the

service and hospitality industry in India. Furthermore, 100 per cent FDI in SBRT has not been perceived by

Indian businesspersons as important or financially attractive.

The problem with 51 per cent FDI in MBRT is not the argument of 'Foreign vs. Indian', but rather that of

'Big vs. Small'; that is, big organisations/vendors/brands/conglomerates pitted against the small traders.Political parties, trade unions and traders' associations have been resisting the opening up of the retail

sector to foreign companies because they believe that it would wipe off the small traders and shopkeepers

across the country.

According to Mr. Vishal Sehgal of Metro AG, the fight over FDI is more towards 'Big vs. Small than

Foreign vs. Indian. Further, he also emphasises the need for generating resources necessary for the

sustenance and proliferation of the retail sector in India. Land acquisitions of regular shapes and no-legal-

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mortification (in excess of 100,000- 150,000 sq ft.) for opening retail outlets in the metros and other tier 2

and tier 3 cities have become a near impossibility. The handling of unskilled and uneducated labour en

masse, in order to keep the operating costs low, has finally started becoming a major hurdle. Dr. Mukherjee

and Mr. Sehgal both agree that India is fast running out of capital required for investment in such sectors

and that if foreign investment does not come soon enough, we might end up draining our financial

resources over survival issues rather than ensuring the growth prospects of the nation. They also agree that

market surveys over issues/policies/products did not exist earlier and that they would only help in leading

to false conclusions. Thus, in effect, it is important to run 'pilot projects' on 51 per cent or 100 per cent FDI

across various states for a couple of years, after which their and then its impact analysis can be undertaken.

Such projects should be taken up eagerly and proactively by both the private and public sectors.

According to Professor T.S Papola of ISID, the increased stake of foreign retailers would increase

investment, but could drive kirana shops and local retailers out of business. Jobs may shrink due to the fact

that these chains fall under the organised sector, and would employ skilled labour. The labourers currently

employed in local stores are unskilled. Another drawback is that farmers may be left at the mercy of big

chains after having burnt their bridges with mandis. Increased FDI would lead to a flood of cheap imports

as retailers hunt for best bargains. Since an important argument is that such big chains would generate

more employment, it becomes obligatory to consider the disparity between jobs lost (small retailers andworkers) and the new jobs generated. According to recent figures, 48 million workers are employed in the

trade sector, out of which 51 per cent are in retail. Most of these workers are unskilled. India has a high

density of retail outlets but these are unorganised. The average production per worker in the organised

sector is about six times the average production per worker in the unorganised sector. Hence, it is natural

for retailers to become organised. Also, the Indian retail market is characterised by disguised employment,

which would end by the development of the organised supply chains. Displacement and some job loss are

inevitable. However, FDI should be welcome if it leads to an increase in productivity. The downsides may

be ignored if the benefits overshadow the hitches. A suggested solution is to try and achieve faster growth in

other sectors like manufacturing to accommodate the displaced people.

Professor Sukhpal Singh of IIM Ahmedabad emphasised the impact of increased FDI on farmers. In his

view, the debate should address the larger issue of capital mobility vs. labour mobility. The investment thatis being made differs in scale and not nature. An investment of this scale, whether Indian or foreign, is

bound to have the same impact. To conclude the debate as to whether more FDI should be allowed in the

retail sector, it may be useful to look at the experience of the FDI phenomenon globally and rely on the

evidence from the latter. It is important to consider what is expected out of this expansion. Is it only limited

to better prices or does it contain other benefits? A common myth that has been propagated is that bigger

retail stores, better packaging, refrigeration and transportation would reduce the wastage of food and other

commodities. However, wastage as such is not that significant even under the present market practices,

and it would more or less remain so. Also, it is important to understand that lower wastage after

procurement does not affect or afflict the farmer in any way. It might be questionable as to whether FDI in

retail would benefit the export sector or will would impose the threat of cheaper imports, that is, a retailer

might not prefer to export local produce, and instead import better or cheaper produce from someone else.This makes the intentions of MBRT questionable. Would it serve this market or merely use this market to

serve other markets?

The policy that has been proposed falls short on a number of accounts. It has no mechanism to benefit or

protect the small farmers. Some important and useful aspects that should have been included/considered

are: mandatory procurement from small and medium farmers, enforcement of contract farming regulation

of malpractices, and written contracts. The new policy, if implemented, shall undoubtedly affect

Consequential Changes in Agriculture, Labour and Retail Markets

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employment. But this effect has been mostly misreported. It is incorrect to count farmers who would sell

their produce as employed. If this is true, it implies that the same farmers were unemployed earlier. To

gauge the consequences, it is important to try and assess the net effect on employment. A major concern is

inflation, which features in almost all the debates related to this issue. There is no evidence to support the

argument that the introduction of supermarkets leads to a reduction in prices, hence it is erroneous to

assume so. Instead, this may lead to supermarkets charging higher prices in remote and poorer areas due to

increased logistic costs.

The policy should leverage the strengths and resources of foreign investors and help us develop ours. It

must be regulated well. A useful suggestion is that zoning should be followed in cities to prevent massive

displacement. There could be a quota for SME and SMF to ensure their welfare. Rules like slow expansion

and mandatory distance from the city centre would ensure a sort of quasi-protection.

Prasenjit Bose, a former member of the CPI(M), suggested that one needs to go beyond the free market

orthodoxy and look for heterodox view about how the economy actually functions and its impact on the life

of common people. He pointed to the growth process during the last 20 years of economic reforms. In 1991,

the agricultural sector contributed 30 per cent of the GDP while employing 65 per cent of the workforce.

Agriculture in 2011 contributed around 17-18 per cent and employed 58 per cent of the workforce. This

clearly indicates that the locus of growth and output have shifted out to the service and manufacturing

sectors. As a result, we do not have sufficient employment in the service and industry sectors to pull out the

surplus workforce from the agriculture sector. He mentioned that the informal sector today accounts for 90

per cent of the workforce and that FDI in retail would lead to a massive loss of jobs. The unorganised retail

sector is the second highest employer after the agricultural sector. The average number of employees in a

hypermarket like Wal-Mart is 200. Thus, at least 20,000 stores are required to accommodate the displaced

labour force. Therefore, it is a myth that organised retail would create new jobs. FDI in retail would not

benefit the farmers and the Government needs to support them. There is much more scope for the public

sector to grow. In the US, 75 per cent of the cold storage facilities are run by public sector companies,

whereas in India, the corresponding figure is less than 1 per cent. Bose argued that the Government needs

to understand that our domestic growth is not based upon sustained expansion of our domestic market, but

is dependent on a very thin crust or the elite class of the Indian society. The modernisation in the retailsector has to happen at a pace wherein the interests of the unorganised retailers are not jeopardised.

Gautam Mody of the New Trade Union Initiative argued that FDI in retail cannot accommodate the huge

number of people working in the informal work. There is no evidence that FDI helps in fighting poverty. If

we are addressing the food inflation and high prices, then we also have to address the question of food

security. We need to create jobs. Manufacturing is a highly elastic sector for creating jobs. The

manufacturing sector in India, after a few initial stages, is either import-dependent or technology-

dependent, and is not creating jobs. Rather than allowing FDI in retail, we need to find a way of

modernising our retail sector. We need to look for alternative supply chains, and above all, to find a better

alternative to fight poverty and to create jobs.

Political Response to FDI in the Retail Sector

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Chapter 8: Current Status and Other Perspectives on the Issue

Current Status and Other Perspectives on the Issue

Finally, after a lot of discussion and debate, the UPA Government at the Centre mustered courage on 14

September 2012 to open the gates for foreign investment in multi-brand retail. Foreign giants such as Wal-

Mart, Tesco and Carrefour are now allowed to enter the Indian market with a 51 per cent stake in Indian

joint ventures. The Government also eased sourcing norms for single-brand retail and permitted them to

buy at least 30 per cent of the goods from the Indian market instead of the earlier stipulation that made

purchases mandatory from small and medium units. The decision of implementing FDI in multi-brand

retail has been left totally to the states. The states which do not wish to implement it would get the freedom

to follow their decision without any interference from the Centre. As of now, 10 states have given their

approval in writing, including Delhi, Maharashtra, Rajasthan, and Haryana. Ms. Shiela Dixit, the Delhi

Chief Minister (CM) believes that FDI in retail would help resolve the problem of wastage of foods and

vegetables, which is occurring today at a large scale due to the unavailability of cold storage facilities. She

also believes that due to this move, farmers would be able to get the right price for their produce and the

customers would get quality products at a reasonable rates. However, states like Uttar Pradesh (UP) and

Tamil Nadu are strongly against this move of the UPA Government. Mr. Akhilesh Yadav, the CM of UP, feels

that FDI should be allowed in the field of electricity and roads, but not in retail. His concern is for the smallkirana shop owners, who would get replaced by big giants such as Wal-Mart and Carrefour. Ms.

Jayalalithaa, the CM of Tamil Nadu, also holds a similar opinion. According to her, giving the states the

liberty to choose whether FDI should be allowed or not, would only lead to confusion and eventually cripple

the economic growth of the country. She further said, FDI in retail is neither going to bring down the prices

nor will it improve the investment climate. It will only promote growth of large monsters in the name of

MNCs, which will destroy the small and marginal traders and exploit consumers through their predatory

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pricing as has already happened in many countries all over the world in the past. Mr. Ashok Chawla,

Chairman, Competition Commission of India, said that the entry of big players in the Indian retail market,

would encourage competition whereas according to a different school of thought, it is only the MNCs that

would benefit from this policy. The proponents of the latter believe that this policy is attacking 22 crore jobs

in trade as well as influencing farmers by selling them costly seeds, fertilisers, insecticides, etc. Wal-Mart,

for example, is a $470 billion business, which is run by only 2.1 million employees, whereas the Indian trade

sector is a $420 billion industry run by 220 million people. Therefore, the gap is huge and according to

Ashish Mittal, leader, All India Kisan Mazdoor Sabha (AIKMS), it would be impossible to fill.

Meanwhile, defending FDI in retail and other sectors, Union Minister V. Narayanasamy, said that the

country was expecting an investment of about US$ 700 million besides the provision of huge employment

and the creation of agro-infrastructure. He said that FDI in retail would not only help farmers and

consumers but would also boost the country's economy. He also claimed that farmers could get agricultural

loans at low interest rates while the consumers would be able to avail of quality products at lower prices.

Only the middlemen would suffer while the farmers and consumers would benefit. The former would no

longer be able to take undue advantage of the infrastructure such as cold storage facilities. Also supporting

FDI in retail, R.V. Kanoria, President, Federation of Indian Chambers of Commerce and Industry (FICCI)

said, There will be a multiplier effect in terms of employment generation and domestic manufacturers will

benefit as they integrate with the supply chains of global retail majors. Consumers will have a wider choiceand get better deals. He averred that the farmers and consumers too are in favour of 51 per cent FDI in

retail. A delegation of farmers from Punjab thanked the Congress President and UPA Chairperson Ms.

Sonia Gandhi for the Government's decision to allow foreign equity in multi-brand retail and said that the

move would benefit both the farmers and consumers. In order to ensure justice to farmers, Wal-Mart aims

at procuring as much as possible from direct farming so that the procurement from traders in local markets

is as little as possible. When the consumers were asked about their views, 55 per cent of them felt that this

decision of the Government would generate more jobs. More than half of the respondents felt that the big

giants would throw the kirana stores out of business. However, at the same time, they were optimistic

about the back-end infrastructure that the big business houses would set up in order to reduce the wastage

of farm produce and the consequent improvements they would bring about in terms of livelihood for

farmers. On the opposing side, certain corporations pointed out that the Indian grocery stores are anyway

not doing too well because of inflation and opening doors to international brands would only worsen their

situation. The RBI Deputy Governor, Subir Gokarn said, The ultimate solution for high food prices is very

simply [ensuring] more production of things that the people consume more. You might debate the merits

and demerits of FDI in (multi-brand) retail. But let's focus on the basic problem. We need to increase

productivity and distribution efficiency. He further said that considering that India has low productivity

and inefficient distribution, increasing the scale of investments in the organised retail sector is one way of

increase productivity and distribution efficiency. And FDI enables us to do so.

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Chapter 9 : Conclusions and the Way Forward

Conclusions and the Way Forward

FDI in multi-brand retail has become a contentious issue in India because it has the potential to change the

landscape of India and the way in which local markets are organised. On the one hand, the evidences for

both the beneficial and adverse impact of FDI in retail are available, and it is quite unpredictable as to the

kind of impact it would have on the Indian retail scene in the short and long run. On the other hand, it is alsonot necessary that foreign retailers would find it easy to set up and run successful business ventures in

India. Many of the Indian retailers in the organised sector have found it difficult to make profits due to high

operation costs, which includes exorbitant rates of acquiring retail space and unreliable supply chain.

Unlike the manufacturing, finance and service sectors, retailing is deeply anchored in the local context, and

hence, there is a cultural dimension, which may pose a challenge in a contradictory way: people might be

ambivalent about the cultural changes which would emerge with the disappearance of the familiar

shopping experience, whereas foreign retailers might find it difficult to adjust and cater to the local tastes.

The challenge before the MNCs who want to enter the Indian market are: achieving the right retail format to

meet the demand of various consumer groups, creating a modern back-end operation system, accessing

reasonably priced floor space, and adjusting to the local tastes. The cost of such intervention is extremelyhigh. It remains to be seen whether the private sector alone would invest in and develop warehouses, cold

storage chains, and rural roads, and facilitate electrification, or it would invariably depend on the public

sector to develop the required infrastructure.

On the political front, there are various strong regional interest groups which control the market, and it has

to be seen how they interact with the MNCs and other big retailers. It is quite likely that they would form

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some alliance with these big retailers, while retaining their share in the supply chain. However, one

significant concern is that FDI in retail would be detrimental to the interests of small traders and many of

them would find it difficult to operate in the new environment, and hence, this would lead to a large-scale

loss of jobs. Given that FDI in retail is a state subject, the state governments might not be willing to allow

MNCs to operate if the loss of jobs is substantial and with many of these governments facing financial

constraints, they might not be willing to take the risk.

What we would perhaps witness is a gradual entry of MNCs, initially restricted to the metropolitan cities,and even there, within the well-off areas. The other real challenge before the proponents of FDI in retail and

the MNC-retailers is as to whether the average prices of products would remain steady or fall even lower.

The latter situation would augment the inflationstabilisation policies besides also attracting the price-

sensitive Indian consumers.

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