Analysing Foreign Direct Investment in Indian Retail business

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Currently the Indian government does not allowed Foreign Direct Investment (FDI) in the multi-brand retail business in India. However the Indian government has recently revealed its intentions of allowing FDI in multi-brand retail.

If this government proposal goes through, what impact would it have on the existing multi-brand retailers in India like Pantaloon Retail India, Tata's Star Bazaar, RPG's Spencer Hyper, Reliance Retail, etc.? Analyze using Porter's Five Forces Model.

Word limit: 800 - 1000

MICHAEL E-PORTERS FIVE FORCES MODEL OF INDUSTRY ANALYSIS

Financial Express 9 July page no.9

The department of industrial policy and promotion (DIPP) discussion paper on FDI in multi brand retail has spurred the debate on whether FDI should be allowed in multi-brand retail and, if at all what should be the conditions?

At present, FDI is not allowed in multi-brand retail. Last year when food prices increased, the government floated the idea of allowing FDI in multi brand retail to streamline the food supply chain.

DEGREE OF COMPETITIVE RIVALRY AMONG COMPETITORS

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The impact on Pantaloon or Reliance Retail and other stores which are not FDI funded will be minimum

As there are various conditions put up in the discussion paper placed by Department of Industrial Policy and Promotion on its website like:

It is proposed to reserve at least 50% jobs in retail outlets funded by FDI, for rural youth.

A 50% of FDI coming in be spent towards building up backend infrastructure, logistics, agro processing, since this is a profit lowering activity involving high fixed costs it is not so in case of Indian organized retail players.

It will be difficult for new entrants to identify locations for stores, as they will be allowed to come up in cities with population of over 10 lakhs i.e. on outskirts

These new entrants have to source a percentage of manufactured products from the domestic SMALL MEDIUM ENTERPRISES (SME's)

Business Standard 12th july page no.13

The paper has many such level playing field suggestions which makes one wonder that how the government is going to protect the KIRANA'S STORE.As the objective to put these conditions is, to protect the kiranas store.

Reservation of 50% of FDI to be spent towards building up back hand infrastructure, logistics and agro processing are profit-lowering activities which are not applicable to pantaloon retain……etc

As per the ICRIER report on retail 2 years ago, the organized retail sector would have 16% market share by 2011-2012 of India's total retail market; we are in 2010-11 and the organized retain has captured just 4% share of India's total retail market. Seeing such a large market size, the degree of rivalry to capture larger market share would be low.

Threat of potential entrants

The above said stores Pantaloon or Reliance Retail will not have much threat as the new entrants will be able to achieve low economies of scale.

The Pantaloon or Reliance Retail will not be affected as there are no such products which are not available in such stores, which FDI funded stores are going to bring.

As investments in backend infrastructure, logistics, and cold chains are likely to be substantial

There are very less chances of threat from potential entrants.

Business Standard 12th July page no.13

The common thought process that the Indian organized retailers would attempt and establish developed supply chains in one zone of the country and/or in one merchandise type, prior to their attempts to move and establish in other zones and merchandise types is not developing in the perceived direction. For example Reliance retail aims at increasing its sales to 10 folds in 5 years with a wide bandwidth of products like FRESH, MART AND SUPER, and "specialty" formats like DIGITAL, TREANDS , WELLNESS, FOOTPRINTS, JEWELS, TIMEOUT, AUTO ZONE and LIVING with the Reliance prefix. The implementation of this strategy and aim by reliance solely depends on their management style, focus and commitment. It is definitely an uphill and challenging task. Hence the Indian organized retailers shall have to face the FDI funded multi brand retail competition.

Shoppers stop for example has set up outlets in cities with large markets like Mumbai, Delhi, Bangalore and Chennai. It still remains to be seen if it is logical to set up outlets geographically so far apart as their requirements of transporting the slow moving items shall be substantial. It is inevitable that they will face competition from the FDI funded multi brand retail stores

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The Aditya Birla group who bought South Indian Chain Trinethra 4 years ago has outlets in Delhi and Mumbai. If it would have remained focused in the southern part of the country and had set up supply chains there, they would have been more successful. They had last year only closed down their 100super markets named "more". Hence such types of stores are going to face severe completion if they are not going to get their policies right.

However Bharti Group would be in a better position to face completion by concentration on setting up outlets in a few cities of Punjab and making the supply chain management work in these cities before moving on to other cities in India.

Threat of actual or potential substitutes

Unless the new entrants are able to bring in new products or services which serve the existing consumers needs differently, Pantaloon retail India etc are not going to face any kind of risk of substitute products.

The number and quality of items available in the foreign stores in the developed nations are substantially at an advantageous position as compared to products available in the organized retail stores in India. FDI funded multi brand retail stores will be in an advantageous position to import these items at a cheaper rate from the foreign suppliers. Hence the organized retail stores in India will have to keep their prices and quality under check to continue their presence in the retail market.

Power of suppliers

The stores like pantaloon will be affected as power of Indian suppliers will be high on the arrival of FDI funded multi brand retail stores, as the suppliers will have an alternative to supply to both the existing Indian /FDI funded , multi brand retail stores. Moreover FDI funded multiband retailers since will invest IN FRONT END RETAILING and IN THE DEVELOPMENT OF POST HARVEST AND COLD CHAIN INFRASTRUCTURE. They may also act as suppliers to Indian organized retailers

Business standard 8th July pg no 8

FDI funded stores as suppliers will tend to gain as direct procurement from farmers, improvement in supply chain in efficiencies ( like removal of unnecessary intermediaries and reducing transit losses), improved storage capacities reducing wastage and improving control over demand supply imbalances , better quality and safety standards will ensure better products at cheaper prices, as compare to higher prices charged by Indian organized retailers

Power of customers

Power of customers will rise as there will be an element of competition and there will likely to be a price war for products and services in between the existing multi brand retail stores, kirana stores and potential stores likely to be set up through FDI funding.

Business standard 14th July pg no 8

Clients in Indian cities are very particular to buy from outlets which give them value for money and good quality merchandise. Buying fresh raw material and cooking is the social norm. The local Kirana stores, grocers and weekly markets shall be regularly visited by residents at a stone`s throw distance to fulfill their daily needs where vegetables and other general items are sold at very cheap rates.

The large FDI retailers shall cater to the monthly retail need of families for products and services. The high residential density and the related development of dwelling units in large cities have left very little space required for operating large FDI funded outlets in crowded areas. The effort required to approach a large FDI funded store in large cities with the present road connectivity, parking and other civic infrastructure shall insure the survival of the local Kirana stores and weekly haats. Indian entrepreneurs and local Kirana store operator offer innovative services like free home delivery of groceries with no minimum order binding, monthly credit and a very personalized approach to the neighborhood customers.

It is estimated that India has the highest shop density in the world, with 11 shops for every 1000 residents. It shall be a formidable task for FDI funded stores to meet this benchmark of services on offer by this abundance of local Kirana stores.

Come what may it will increase the power of buyers of retail stores like pantaloon.etc

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In conclusion there is no doubt that FDI in retail will have a deep positive impact on the Indian economy in entirety. FDI in retail if carefully studied implemented and enforced with a system of control will boost our economy. Indian producers and farmers shall get justifiable rates for their farm and factory products and Indian customers shall get the best brands at reasonable prices.