Fdi in retail: countries like germany, south africa & uae ha

Vivek (CA ) (2368 Points)

11 December 2011  

FDI in retail: Countries like Germany, South Africa & UAE have benefitted from modern retail

Prakash Nedungadi

The recent opposition to allowing foreign direct investment (FDI) in retail is fraught with apprehensions of its impact on stakeholders such as small suppliers, small retail trade, middlemen and consumers - all politically-important classes, some of who have vested interests in a status quo.

However, as a country, we should also move on to a change for the better by learning from other countries' examples. Fortunately, we are not the first country to have modern retail and, hence, there are good experiences to understand and learn from so as to build our confidence to move forward.

Here are cases from three countries in three continents that I have dealt with in all forms of trade and studied the impact of the modern retail evolution.

The first is Germany. The rapid growth of modern retail in Germany and Europe took place over two decades ago. It did result in a swift and major consolidation of stores, weeding out the inefficient, individually-owned and less-adaptive small stores. However, there were a few points worth noting.

Firstly, the concentration led to retail chains forcing manufacturers to cut costs and become far more efficient in their supply chains. Due to competition, some of these chains, indeed the leaders, took positions as discounters and passed on the lower prices to consumers, who got a better deal. Most retail chains operated on razor blade-thin margins - unlike in traditional trade where, often, middlemen's margins would lead to a much higher cost structure.

Secondly, the leading chain, a group called Aldi, efficiently continued with the small-store format because they found it was what consumers wanted (e.g., they wanted to be able to walk, not have to drive, to their grocery store). So, in terms of employment and in terms of dispersion of stores, the impact was not as if one massive store came in an area and swallowed hundreds of stores around it.

Thirdly, one of the large chains was actually a cooperative of small stores. These adaptive small-store owners realised that, while they provide unique benefits of location and service to their customers, they need to buy efficiently through a central organisation, have one brand name to gain from marketing and have one set of processes to benefit from large-scale, technology-led process development.

By forming a large cooperative, they retained a large level of ownership and independence while gaining the cost, marketing and process-capability advantages of modern retail. Hence, it is possible for small stores owners to respond and acquire many of the key advantages of large stores while building on their own areas of strength.

Finally, we came across a store from Sweden like IKEA, a large-format furniture and home store, which has invested enormously in skill-building for small suppliers from all over the world, including India. If retailers such as these come to India to sell, they will also see huge sourcing advantages from India and, hence, have a strong stake in building local suppliers not just for the Indian market, but also for their global market, thus adding to employment and exports revenue.

Move to South Africa. The situation here was obviously different from Germany and Europe: far lower levels of income, higher poverty and more unskilled labour. The modern retail consolidation happened to a large extent here as well.


Interestingly, most of the big retailers are local players, not the big Walmarts, Tescos or Carrefours from the US or Europe. The competition between these South African chains was fierce and, hence, consumers did get the benefit of lower prices due to competition and consolidated buying.

But often, the in-store experience, availability and the efficiency of the supply chain left much to be desired. My experience was that these chains were not investing enough, especially in the areas of building supplier bases and skill-building of their workforces.

Hence, by having only local retail chains, the delivery of modern retail was almost 'half-pregnant', impacting small retailers and small suppliers on the one hand, but not being able to gain greater efficiencies of well-invested modern retail with well-skilled staff on the other.

Come to the UAE, closer home in Asia. Being positive to foreign investments and a rich country as well, the UAE (and the Middle East in general) is an attractive investment opportunity for many modern MNC retailers. In the grocery sector, France's Carrefour is a leader.

However, the interesting fact is that the store chain that is gaining fast and is offering strong competition (and leading in some cases) to Carrefour is not some other European or American chain; it's a chain called Lulu started by a simple, hardworking, enterprising Indian. This store chain is successfully expanding all over the Middle East and has earned the respect of retail experts the world over.

Another big retailer in the UAE owned by Indians is looking at acquiring well-known retail businesses in Europe, a reverse FDI, like Tatas did with Jaguar Land Rover. These examples suggest that Indian retailers can hold their own and lead as well when they are enterprising and customer-focused.

These cases from three countries in three continents of varied circumstance tell us that the coming of FDI in retail in India is not to be approached with such trepidation. In fact, it is beneficial to ensure we get the full benefits of modernising our retail.

It also suggests how to manage the evolution, for example, by helping small and enterprising retailers who want to adapt to change (rather than resist it) form cooperatives and self-help groups, and giving them support in branding/marketing, supply-chain efficiency and centralised sourcing.

We in India need to listen, learn and move quickly to embrace change in modern retail. Opening up to a freer market (including foreign investment) with proper checks will not weaken us, but only help to strengthen us for our own benefit.

(The author is former marketing directorof a US multinational company)