The market is rejoicing over Indian government’s decision to open up FDI in retail. It’s cited as a sign of the beginning of reforms era. Most pink newspapers look positively at this move. Though there are some alternative views too http://www.firstpost.com/business/the-murky-truth-behind-upas-big-bang-friday-reforms-456864.html/2
FDI in retail will have several consequences in the long run. One of the side affects of the FDI in retail is the power it will give state level bureaucrats and politicians power over MNC retail companies. The retail firms will now have to shift their lobbying efforts from central government to state governments.
The establishment of a retail outlet comes under the Shops and Establishment Act which is under the purview of the state government. The UPA government has rightfully not tampered with this and left the option of allowing foreign MNCs to state governments. Therefore the opening of the FDI in retail is partial and limited to states like Punjab, Haryana, Maharashtra, Rajasthan etc, where Congress is in power.
This partial opening up also affects existing organized retailers who were hoping to receive FDI stimulus. Existing retail companies may have to restructure their business. the restructure will imply they will have to divide retail outlets in FDI compliant states in one company and the non compliant in another. And they can sell equity only in the former as foreign retail majors cannot invest in retail outlets in states which have not approved FDI.
While for unlisted retail firms this segregation would be easier, companies like Shopper’s Stop or Pantaloon will find it difficult and time-consuming to do this. Hence the unlisted multi brand retail firms like Spencers may attract FDI while listed will have to wait. Indian promoters like the Biyani group struggling with high debt cannot raise quick money through stake sale.
As mentioned earlier the states which are opposing FDI in retail now become the focus for the lobbying efforts. Take for instance BJP ruled states of MP and Chattisgarh, where the CMs have opposed the FDI as a larger percentage of their support base of shopkeepers or shop owners. But it is not just the traders or shop keepers who will be adversely affected the biggest impact will be on manufacturers who are not price competitive with Chinese companies.
Manufacturers who are not price competitive will go out of business very fast as MNC retail will plug-in Chinese supply chain into their Indian retail outlets. Foreign retail firms have enormous buying clout in China because of their global volumes, they will leverage this to attract value buyers. And this has happened in several countries including neighboring Thailand where domestic industry has been severely affected by the entry of Foreign retail.
Garments, non branded packaged goods are some of the industries which will be the first one which will see the price pressure. Once MNCs start getting goods from China, Indian retailers will have no choice, but to do the same to match prices. And this will accelerate the shift of manufacturing from India to China.
White label or store labels shall be procured from Chinese manufacturers, and this will in turn have an impact of domestic brands as they will come under price pressure. HLL, P&G and Godrej Consumer will be some of the companies who will face pressure on their margins as global supply chains start pumping into India. Global retail Giants like Walmart have 80 per cent of their suppliers are based in China.
Unfortunately Firstpost still does not get it http://www.firstpost.com/business/kirana-vs-wal-mart-busting-the-big-myths-of-big-retail-459490.html#disqus_thread
The Kiranas will not shut down because a Walmart will come out in the corner. Kiranas business will be affected as a Walmart will be able to offer everything cheaper included branded products from large wholesalers.
The evidence is already there in the form of buying shift taking place in the large cash and carry stores of Walmart in Punjab, MP and even in the outskirts of Delhi. Retailers are going and stocking up from these cash and carry stores as the prices they can get here they can’t get from the traditional wholesalers. Therefore, Walmart has already started controlling the supply chain where it is present.
And don’t forget Bharti Retail has created a smaller format to fit into a city and small markets too with the Easyday brand. This brand can easily be acquired by Walmart whenever it wants.