India to see a retail revolution

The Bharti Wal-Mart joint venture has finally opened its first cash-and-carry store, nearly two years after announcing its plans, and intends to open 15 such wholesale stores in the next three years.

Two European retail majors, Tesco and Carrefour, have announced similar plans while the German group Metro has already established an Indian presence.

If all these entities set up shop and grow as they would like to, together they will eventually have a perceptible impact on the Indian supply chain for retailers-even though the action is slow and change even slower. Modernisation should improve supply efficiencies, so that farmers get a better price for their produce even as consumers get better bargains (the margins in between get squeezed).

This is the core of the trading revolution that India has been waiting for. Historically, the US economy made significant productivity gains during the 1990s when its retail supply chain was revolutionised, leading to the de-layering of the distribution system and better prices for consumers. Conversely, Japan did not and has suffered.

The entry of foreign companies into retailing has been restricted so far to single brand stores (like Reebok and Benetton), ostensibly because of the job losses feared as a result of the possible closing of traditional corner stores.
Hence the stipulation that the global chains open only wholesale outlets, to cater to existing retailers-which is of course a plus in itself. However, this does not mean that organised retailing has been kept at bay.

Groups like Reliance have opened hundreds of stores and are learning that there is no one formula that works in the Indian market; some have even started feeding into the traditional outlets! Given this backdrop, the opposition to FDI in retailing looks more like posturing than being a product of genuine concern for mom-and-pop stores.

If anything, the troubled stores are the new start-ups. For while retail chains like Westside and Spencer's have grown quite rapidly, some chains closed down parts of their operations when the economic slowdown last year dented consumer confidence.

They are now taking a fresh look at expansion and preparing to push growth cautiously in response to lower rentals and a return of consumer confidence.

Retailers have learnt the costly lesson that stores must be opened where they can get a regular loyal customer base, and not necessarily in prominent locations which create hype and footfalls but no commensurate purchases.

If wholesale distribution gets organised, with proper supplier linkages that facilitate volume purchases, the setting up of cold chains, and the development of export markets, then India can reap the gains of modernising its trade without too much hinging on the issue of allowing foreign investment in the sector.

In the process, it could also revolutionise Indian agriculture and lead to sustained growth of output along a higher trend line.