Saturday, April 23, 2011

Is it really the Kirana?

Foreign FDI has been blocked in multi brand retail on the pretext of protecting the small kirana (mom and pop) stores. Sometimes I wonder if this is the real reason. I strongly believe that the restriction is actually to help the large Indian organised retailers. They are the ones to be first affected by the direct entry of Wal-Marts and Tescos of the world in retailing.

The typical design of the large foreign retailers is that they have a very strong but investment intensive back end. In order to get good returns from their investments, the stores have to be necessarily large formats. In addition, in one given market there have to be a high number of stores.

The high lease rates in urban areas of India make it impossible for retailers to have many large stores inside the city. The Wal-Mart model of having the store outside the city would be difficult given the traffic and road infrastructure bottlenecks. In rural areas the scale of operations is generally very low. Indians typically do not have a spend oriented culture like the Americans. So, it would be difficult for a retailer to set up and sustain a large store in a Tier 3 city.

The kirana stores in India have created a very low cost selling model. A pan shop could sustain itself at a monthly profit of around Rs. 5000 only. This number could be much lower in rural areas. This was not the case in the USA. These players can never be threatened by the foreign retailers. The existing so called organised retailers in India would probably have the most to lose.

Indian organised retailers are still in an experimentation mode. They hastily set up the front end and are now trying to make the back end work. Most have poor systems. Some companies have closed down and most of the rest are not making money. They have tried to copy the IT systems in foreign retail as this can be easily bought. But, the human systems and discipline needed are sadly missing.

By getting the government of India to form rules banning the foreign retailers, the organised players seem to be creating space for themselves. Foreign companies wanting to enter India would be forced to tie with the existing Indian players. It clearly seems that the rule has been created in the first place to benefit these large Indian retail players.

Now suddenly there is a talk about relaxing the rule. Nothing has changed for the small kirana owner. But all the large format foreign retailers have already been subdued to partnerships with large Indian firms – this includes Wal-Mart, Tesco, Woolworths, etc. Having done this, and needing more investments, it seems that the large Indian players are now getting the government to allow more direct investment in multi brand retail.

4 comments:

Prakash T M said...

Yes Sir, i agree with you on this...its not the kirana stores rather it the organized retail players who don't want the entry of these Foreign retail companies like WalMart in India...but i am bit confused with the fact that,statistically in India only 4% of our our retail sector is organized, so that leaves a huge scope of growth for these organized retail companies to grow and so why can't why retail sector work in similar lines of Telecom sector, where entry of foreign players has widen the industry and still we have a indian player as the leader.....

Sidharth said...

Fully agree when you say that back ends still are a matter of concern.... and opening up the market will result in true competition. If easy access is the demand of the market, kirana stores will survive and it will also lead the retailers to innovate to offer a different value proposition in which case, ultimately consumer will benefit.

KrRahul said...

Perfect analysis! You are very right – FDI restriction helps Indian large scale retailers and not small Kirana stores.

Aanand said...

Totally agree. The cartel at work again. Hopefully toward a good end.