Will 'FDI in retail' be profitable?

Wed, 26 Dec Pre-Open

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Recently, the parliament gave a nod to foreign direct investment (FDI) in multi-brand retail . As such, global retail giants such as Walmart, Carrefour and Tesco are eyeing a foothold in India's US$ 450 bn retail market. While they are highly optimistic about the India entry it seems that the ride is not going to be that easy as it appears.

Take the case of Indian domestic retailers for example. The top 3 Indian domestic chains namely Reliance Retail, Aditya Birla Retail and Bharti Retail had collectively put up losses to the tune of Rs 12 bn in 2010-11. In fact, these 3 domestic chains have hardly posted any profits since the last 10 years of being into this business. This shows that retailing is a highly competitive business with long gestation period. It is also capital intensive with strong focus on supply chain management. Thus, going by the performance of the domestic players, it seems that the journey of the foreign players is going to be challenging.

However, it may be noted that foreign players have deep pockets. They have the capability to invest heavily to expand their reach and undertake marketing initiatives to spread brand awareness. Thus, the performance of the domestic players might not prove be a deterrent for them. Despite that none of the foreign players have disclosed their India plans as yet. That's because of the flip flop in the decision making issues. Take the case of IKEA for example. The Swedish furniture maker's plans in India were caught in red tape before finally it got the approval to set up shop in India recently.

Thus, while the recent parliamentary approval is comforting, it will take a while before the foreign retail player's start setting up their bases in India. And even if they set up their bases soon to get early mover advantage, a lot will depend on how they are able to change the mindset of an Indian consumer who generally buys from his neighborhood mom and pop store. For example, the domestic players are mostly into losses as they were not able to gain an entry into fresh food and food retail spaces which is dominated by kirana stores. Hence, the biggest challenge for the foreign players will be to break ice here as 70% of the worldwide retail is into fresh food items.

Thus, while the government may have opened the road for foreign retailers in India their ride is not going to be smooth. They will have to understand the market dynamics and take calculative steps to start making profits from their India venture.