Friday, February 15, 2013

FDI in Multi-Brand Retail is the Butterfly

Hello World,

It's been a while……so here I am…wandering the blogwoods like a crazy wolf….howling out my opinions on something that has been keeping me busy for quite some time….

Ever since the news of FDI (Foreign Direct Investment) ruling hit the Indian media, I have been trying to understand it to see how far it is going to drag the Indian business world into a Progressive Transformational Paradigm….So here are my interpretations…..

As the first step I downloaded the FDI Circular released by the Govt. of India and glanced through it. Guess what, after 3 pages I wanted to scroll to the last page… ;)   But as far as my experience goes, that is exactly how I deal with the pdf’s. Glance a few pages…scroll to the last page….read the conclusion….and I would know the crux of the Statistical Mythology that the remainder of the pages would hold. 

From what I understand, in my own stupid way, the FDI Ruling in India basically requests all customer-cheating unethical businessmen to humbly go to freakin hell so that room is made for those businesses that actually care for their customers….No more paper-bundling, sell-without-bill nonsense…consumers will pay for what they get and only get for what they pay….kind of Consumeristic Communism which calls for a class-less society of consumers who would get their money’s worth without having to demonstrate Kryptonic superpowers or ownership of a light-saber (please excuse the light-saber…I like it…)

Snippets from the Consolidated FDI Policy:

Contradicting the popular notion of western businesses taking over India through foreign investment, the Consolidated FDI policy (page 14/3.1.3), as released by the Govt. of India, clearly reminds that since Sep, 16, 2003, OCB’s (Overseas Corporate Bodies) have been derecognized as a class of investors in India. This means that as of now, international businesses cannot invest in India without the RBI (Reserve Bank of India) and Govt. of India approving it. Even the erstwhile OCB’s (those that owned shares in Indian businesses prior to this regulation) cannot invest anymore without the govt.’s approval. This is a typical catch in the FDI policy of any country in this world, unless the country is not in a state of restricting the same. Therefore the FDI regulation that caused a stir recently has the basic cover it needs. Now the govt. can at least know of how much investment is getting routed into India and by whom. The possibility of achieving the “feasibility” of controlling nuisance is finally in the govt.’s hands and hence the age old response that goes like…”there are a million businesses in this country…we are the second highest in population and …it is not practically possible to keep track of all….” has been rendered obsolete in every sense. This doesn’t mean anything ground-breaking to be honest, but at least the regulations have started taking grip of reality in their very definitions. 

Another myth roams around stating that now that the FDI regulation has been relaxed, international business will be the sole owner of businesses here and that the Indian public would be suffering at the hands of international corporate nonsense. Well that is quite similar to the Harry Potter series we’re familiar with….absolute fantasy….from all angles. As per the regulation, international entity can hold only 10% of the capital of any Indian business and even the aggregate holdings cannot exceed 24% of the company’s capital. Now if the board wishes to let more investment to come in, it can do so by informing the RBI and Dept. of Commerce that the board has decided to make room for more investment. Even then Dept. of Commerce has laid out statutory/sectoral ceilings which mean that even if the boards decided, the international holding of the Indian business cannot exceed the ceiling set for the respective business segment by the Indian govt. A classic example is that of Indusind Bank that requested for a raise in the investment limit and was granted a limit of up to 49% with a condition that in any way the composite sectoral cap of 74% must not be breached. Also each sub-account of every registered Foreign Institutional investor cannot exceed a capital holding of 10%. This is quite similar to the Civil Supplies Rationing system where only a certain volume of supplies will be issued for every account/card. So bottom line is that no international business can completely buy out a business to an extent which it can operate at the loss of Indian consumers.

Say Hello to Irony 
Speaking of international business controlling India, I honestly don’t think a major section of the Indian community realizes the fact that our lives are already controlled by products that are produced by companies which are, for the most part owned by international businesses.  Ever heard of Hindustan Lever? Apparently they came into India to sell soaps and now are responsible for almost everything that an average Indian uses. This is just a sample but look below for the brands owned by this company (where 52% is owned by British-Dutch Unilever):
Food brands:
  • Annapurna salt and atta
  • Bru coffee
  • Brooke Bond (3 Roses, Taj Mahal, Taaza, Red Label) tea
  • Kissan squashes, ketchups, juices and jams
  • Lipton tea
  • Knorr soups & meal makers and soupy noodles
  • Kwality Wall's frozen dessert
  • Modern Bread, ready to eat chapattis and other bakery items
Homecare Brands [8]
  • ActiveWheel detergent
  • Cif Cream Cleaner
  • Comfort fabric softeners
  • Domex disinfectant/toilet cleaner
  • Rin detergents and bleach
  • Sunlight detergent and colour care
  • Surf Excel detergent and gentle wash
  • Vim dishwash
  • Magic – Water Saver [9][10]
Personal Care Brands: [11]
  • Aviance Beauty Solutions
  • Axe deodorant and aftershaving lotion and soap
  • LEVER Ayush Therapy ayurvedic health care and personal care products
  • Breeze beauty soap
  • Clear anti-dandruff hair products
  • Clinic Plus shampoo and oil
  • Close Up toothpaste
  • Dove skin cleansing & hair care range: bar, lotions, creams and anti-perspirant deodorants
  • Denim shaving products
  • Fair & Lovely skin-lightening products
  • Hamam
  • Lakmé beauty products and salons
  • Lifebuoy soaps and handwash range
  • Liril 2000 soap
  • Lux soap, body wash and deodorant
  • Pears soap
  • Pepsodent toothpaste
  • Pond's talcs and creams
  • Rexona soap
  • Sunsilk shampoo
  • Sure anti-perspirant
  • Vaseline petroleum jelly, skin care lotions
  • TRESemmé [12]
Water Purifier Brand:
  • Pureit Water Purifier
The above list is from Wikipedia and so don’t take it for granted. Feel free to check the back of the packs of stuff you buy to see if it has Hindustan Lever or Unilever name printed there and you would understand the benefit of foreign investment and also its penetration in the consumer goods sector.
Now, even those who call for total abolition of foreign investment cannot live their normal lives without using the products that are a result of foreign investment in India. This is not something to be ashamed of. This is a case of supply and demand where someone provides for the needs of the others for a price. In some cases that entity just happens to be from a country other than India.

Now that we have established the fact that we already have foreign investment responsible for daily life of average Indians, let’s get back to the analysis of the recent controversy over FDI regulations pertaining to the Multi-Brand Retail sector. We have businesses from outside that manufacture products that we have been using. We are now getting ready to bring in businesses that specialize in selling multitude of products using an inventory-based, logistics-network-supported store system that would enable the consumers (that would be us) in getting access to multiple brands of products. This in other words means that we are very close to getting a wide variety of product choices which would control and slowly eradicate monopoly of brands, where we would have to compromise with the product quality/quantity just because it is the only cheaper version of the product in the market. 

Potential Impact of Multi-Brand Retail on India 

What Multi-Brand Retail would do to any country is quite similar to what Internet did to the world. Shrink the system and bring the subsystems close to each other so that the interaction is bilateral, quick and an inter-dependent yet fairly competitive co-existence. How would this benefit the average Indian? Well, have you ever visited any Indian village and lived their life. It is not as polluted as that available in the cities but they are still lacking access to so many comforts just because those semi-urban and rural communities have been classified “unfit” for access to all the products that are otherwise available in the cities. Villagers still have to travel to bigger towns and cities to make any big purchase for their families. Those villagers are for the most part responsible for the country’s agro-produce but are still left out when it comes to accessibility to products that fall under the basic needs. Even those products that somehow manage to reach the semi-urban and rural communities are either of the most inferior quality or heavily priced. Both the drawbacks exist simply because either there are not many brands of the products available or those who sell them are the kings of those markets who can price the products as per their fantasies. Add a monopoly flavor to their business cuisine and it becomes an economic feast that devours the average Indian on the basis of …”this is how it is…take it or leave it..”… Now what could be a sustainable solution will always remain the question to be answered for it is that question that would take any civilization in the path of real progress. In this case, we need more players to cater to the needs of the consumers. The govt. buying out products and issuing them for free/subsidized rates will not be a sustainable solution as that might make room for corruption of all kinds and the same monopolies would be recreated. We need to calm down and recall how the Soviet Economic System collapsed in spite of its robustness and rigidity. 

Bringing in international players in the Multi-Brand retail segment would bring in competition from outside. There is no denying that. But that competition is not something that would destroy local businesses. A major portion of the produce and manufactured goods in India are being exported to international markets. This is a great source of revenue to Indian businesses and farmers. Whatever we export to other countries are foreign products for those countries!!!! Our products are giving more than a stiff competition to local businesses and farmers in so many countries around the world!!! That doesn’t mean that Indian agro-produce and manufactured goods are destroying other countries’ economies and local businesses. Similarly this FDI ruling only made it easy for the sellers to enter and operate in India. How will this affect the local businesses? These international players would be more systematic in their approach and would do the needful to meet the demands of the consumers, even if it requires import of products from other countries. Now this would in turn call for a market-wise standardization of quality/price. This would eradicate the events where the farmers/businesses would dump the produce in the ground just to bring up the demand and subsequently raise the price for profits. They had a good harvest but they ended up having surplus. That forced them to behave that way. With Multi-Brand retail coming in, farmers and businesses would have more avenues for selling, most of them devoid of brokers and middlemen of all sorts. Also stores would not just buy anything in any physical state from local businesses. Quality standards would be brought into the system. It is true that implementing them would take a while but we need something in place before we can make it work. These would impose strict terms on the local businesses. Those terms would be of quality for the most part. All the brightly lit shopping centers selling packed goods are now boasting of higher quality but not all of them have it in their products. With many businesses in the market, the need for differentiation would increase and after a certain period of time, it would just be quality and off-season availability. This would bring in the concept of a competitive coexistence that would add fairness to the Indian market. 

The Need for a Benchmark

I personally have observed a wave of fake identities that businesses wear to fool the Indian consumers and they have been powered by the fact that they don’t and won’t have a competition. In my opinion, Indian consumers are at times paying more for less of what they truly deserve. A product worth Rs.5 would not even carry a date of expiry and a product worth Rs.500 would be standing in the shelf of a mega-store, at least 5 months past its expiry date. Both the products are harmful to the Indian citizen, both rich and poor. Also anything with the label “export-quality” is considered top-quality and most often, highly priced. I have personally visited stores that sell factory rejects of major brands (that are manufactured in India and have failed the QC in the factory for export) at regular high prices. The customer needs to know the product information beforehand to make a fair assessment before the purchase. Now the businesses can sell off those products as factory clearance or under any other name that clearly tells about the product’s inferior quality. But unfortunately, here in the Indian sub-continent, among the current state of affairs, especially with the business world, fair thinking is often construed as a carnal sin and every action needs to be motivated by a guarantee of an unearthly profit or a fear of apocalyptic damage. Just because there is not enough competition and the consumers do not have the needed awareness, businesses are robbing the consumers in every way possible. 

Early life on the planet had to go by the code of “Survival of the Fittest.” The average Indian, a modern consumer of the modern commercial world needs more protection from the business end, so that he/she need not fight to survive amidst anomalies such as non-availability, non-accessibility, inferior quality, brand monopoly etc. The consumers should not be left alone to fend for themselves. Also the businesses need to be provided with multiple avenues of selling so that there is free movement of goods from one part to another without having to be destroyed in case of surplus produce. Awareness is a key but not the only one to operate the free-market of the modern world. The businesses have to do their part to substantiate the reason for their existence. Over six decades into freedom, so far it has been social reforms that have been structuring the Indian society. From now on economic reforms and entrepreneurial ventures will be having their fair share of responsibilities. 

All I care is that, every Indian, irrespective of his/her socio-economic status, must be entitled to the basic consumer rights without having to contest it in a legal battle. The average Indian needs to get what he/she pays for and cannot be shepherded by entities that does not care about consumer welfare. The Indian market needs Big Brothers to come in and educate the consumers and businesses about how both of them are inter-dependent. It is the existence of a fair competition that would push for fairness. It is that fairness that would create a free-market where business and consumers can exist in harmony. We are supplying produce/goods to so many countries and it is only fair to let other countries supply to us. Until we have many, we would never know what the best would be like. Also we don’t have to depend on a few for our needs. 

A time will come when Indians would have forgotten the idea that anything cheap is inferior and everything expensive is the best of its kind. A long chain of events have to be completed before that statement can  be rendered true but this Chaos now needs the first flutter and FDI in Multi-Brand Retail is the butterfly. 

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  1. Hi Motts,
    I know that products are made by foreign companies, but FDI is not addressing that problem rite?
    If middle men are making too much for too little service, there should be more people getting into the middlemen business. Stuff like storage, infrastructure are something that the government and local investors could organise.
    May be we get a lot more products..some of it may be contributing to the non-essential imports which account for hundreads of billion $ already( and affecting the balance of payments in a big way..its mainly the import of luxury goods like TVs and Mobile phones). But these guys will put a lot of small retailers and middle men out of business & livelihood.
    The whole point of development is reduce uncertainity in the lives of local people. One always has to be cautious about ushering the farmers, human/resources to depend on Global markets and Companies for their livelihood.
    I can give up protectionism..only when the whole world is truely Globalised – Not just globalisations for MNCs to make profits everywhere, but the opportunity for people to move around freely to seek opportunity..In terms of people migration it has been reverse globalisation over the past 100 years. I can open up indian markets for foreign companies to make profits..Only when they open up their doors for Skilled indians to migrate..Not like those H1B visas and in the gulf where they work and develop the companies and are kicked out without having any stake. Its the richer countries that has to give in first.
    America and certain other regions have vast lands for agriculture and other essentials, where there is never going to be a shortage of healthy food and resources to consume for thousand s of years to come. When they open up their country, we open up our market to them. We dont really want to help the socialist american regime where it pays bludgers to selfishly replicate, whereas the Indians over there do the ahrd work ad are kicked out or having amongst the lowest of fertility rates due to exploitation and being stressed out.

    FDI maybe a good thing only for those who think that a certain community of India is unfairly dominating the Retail scene across India, and which needs to be changed. But with the business-technology, capital and investment scenario changing, I think things can turn around and there could be chennai based all-india level retailers too. We just cant let the big players come in give away the chance we might have.

    1. Dear Jayan,
      Thank you taking time to read my blog and your comment.

      The idea of small businesses being thrown out is an overstatement since the FDI regulations that are already existing are just being relaxed to bring in more investment into the country. There is a cap for every segment of holdings possible and they vary from industry to industry. The small mom-n-pop stores would remain as such here in India since their business models are designed so. There is a huge population here that cannot afford to buy from super-markets and they will continue to rely on smaller retail stores alias "annachi-kadais" for their daily needs. A popular opinion of bigger stores rendering smaller ones have been floated without substantiating explanation from the micro-economic standpoint. Will there be a challenge to smaller stores? Definitely yes. Not in terms of sales-snatching but in terms of quality-offerings to the consumer.

      Larger inventory-based stores that FDI would bring in will have to rely on the middle-men and farmers around here. The disadvantage would be that no middle-men controlled supply shall exist. If the middle-men threaten to increase demand by hoarding/stocking, these stores would bring in similar products (substitutes) from other markets. The small retailers won't have to increase their price because the supply has been stopped. Either ways, the common man would get his daily needs without having to pay exorbitant amounts, either from the supermarkets or from his street's grocery store.

      Our citizens from humble economic backgrounds cannot afford simple food items simply because these items are sold in large volumes and at higher prices, only because the sellers have a monopoly. Larger retail stores work on the concept of smaller volumes, lower prices and profit that relies on what is called "economies of scale." They will look for more sales to get higher profits.

      America has a vast land spread but unfortunately it does not have all the necessary conditions to support farming of all vegetables, fruits and grains. United States itself relies heavily on international supplies for its needs. Anything you buy there would most probably be from an Asian market. And there is no way the word "socialist" be related to anything even remotely American. Their political philosophies have always rallied against "communism," which is popularly known as "socialism without the violence." America is in fact more capitalistic.

      Coming back to FDI in India, it does pose challenges in terms of quality and accessibility which definitely needs improvement here in the Indian market. The difference between the poor and middle-class will substantially decrease in terms of purchasing power ( for agro-produce and consumer products). People won't have to buy rotten tomatoes from the secluded basket in smaller street-stores simply because they don't have the money to buy the good ripe ones at market price.

      The idea that may be imposed by FDI in retail on our society at large will read something like "Either sell or let someone else sell, so the common man can buy what he wants in volumes of his choice at affordable prices."

      The idea that may be methodically erased (over a period of time) from our society would be,"This is how I will sell and this will be the price for it. Take it or leave it but I will be the only one you have to buy from."

      Large scale retail cannot survive the "cheat-all-the-way-because-everyone-does-so" technique and any low-margin large scale business would need more committed and sophisticated approach which calls for practices that our corruption practices would not recommend and therefore would be entirely new to our market. This is one the reasons for letting foreign direct investment into the retail domain.

  2. Im no annachi, but Im working on a Business Intelligence startup and my main targets in the city are going to be annachi kadais and gujjus n marwaris at the national level. Thats pro'ly why Im a bit concerned for them. I lack the expertise to get the micro economics that you have mentioned,but I hope somehow there will more resource accessible for everyone to consume.
    Socialist or not, the poorest communities are always the ones with a higher birth rate in any part of the world. This is sorta counter intutitive and imo the reason for a lot of problems.
    Its just that when you hear about indians in the US living in their own cultural ghettos, having to work hard and have the lowest birth rates, whereas the mexican and the african-american community depending on government hand-outs having the highest ones over there, you begin to think that we are in a way being used and losing out.

  3. All the best for your BI Start-Up!!!

    Your expectations of resources for everyone will be realized over time but they will come at a price. "Customer Welfare" and "Zero Quality Compromise" may be the emotional or strategic focal points the price for those resources would revolve about.

    The cultural-ghetto and living-on-handouts perspectives are reasonable to some extent. But in my view, anyone who depends or craves for "Free" is vulnerable to being used and thrown away. Immigrants in any country tend to cross the legal norms of the land to some extent for the sake of their survival and nobody can be called an exception in any country for that matter. From what I've seen, we lose a lot out at the hands of our own more than at the hands of others, especially outside India, irrespective of cultural compatibility. I believe sometime back in the US, an Indian guy tried to kidnap a 10-month old baby (belonging to Indian parents) and in the attempt, killed the baby and its grandmother. Fake Universities that traffic in internationals as students were busted and the owners turned out to be Indian. My point is that we're losing but not at the hands of others but within ourselves. Incidents like these would prompt the countries to stereotype us and other internationals and the resultant stricter laws would only worsen our situation there, making us vulnerable.

    The FDI thing here is a strongly held economic reform and we will find more avenues for growth in the small/mid segments of retail sector as a result of this FDI relaxation. How we prepare ourselves is going to be strong success-determining factor though.


Thanks for the comment!!! Have a good one!!!!