Why does FDI in multi-brand excite Indian retailers?

Indian retailers have reason to be happy with FDI in the retail sector because it is a partnership opportunity that involves a lot of learning that could take them to higher profitability. Vivek Sinha, Teejesh Behl & Rachit Vats report. Retail detail

Indian retailers have reason to be happy with foreign direct investment (FDI) in the retail sector because it is a partnership opportunity that involves a lot of learning that could take them to higher profitability.



Giant retailers such as Wal-Mart and Carrefour, with decades of experience, typically bring in expertise on how to manage mountains of inventories, supply them to key distribution centers – and do it all faster, better, cheaper.



"The arrival of foreign retailers will definitely bring in synergies in management practices," Arvind Singhal, chairman Technopak Advisors said.

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And of course, there is the capital that would make this happen. Giant retailers have buying power – cheaper by the dozen, as they say – that helps them consolidate purchases and pass on some of that unit price gain to end consumers.

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FDI norms cleared last weeks stipulate a 51% equity limit for foreign firms – which means they need partners who can gain.

Sanjiv Goenka, group chairman, RP-Sanjiv Goenka Group, which owns the Spencer’s chain, said a consolidated back-end could be the biggest gain. “It will also help reduce procurement costs,” he said.

Homegrown retailers have not had the muscle and the reach to go for the big game. For example, Subiksha and Vishal Retail expanded their storefront chain, but did not have the resources to manage the back-end across several cities.

Thomas Varghese, chairman of CII’s National Council for retail, who also heads the Aditya Birla Group’s retail business, said his company may not be seeking a partner and FDI will be for those needing capital.

Govind Shrikhande, managing director of Shoppers Stop, said competition will lead to a rise in real estate prices as organised retail typically operates in stores upwards of 10,000 sq ft.

“But this investment is going to happen over a period of five to seven years, not overnight. And certainly not till there’s more clarity on policy,” he said.