FDI–Bane or Boon?

"Don't find fault, find a remedy"

Henry Ford

This adage reverberates ever so relevantly in today's Indian retail sector scenario like never before, especially as two schools of thought (both political as well as economical)debate over the benefits of FDI in multi-brand retail. Leaving aside the politics, even from the economics angle, most multi-brand retailers are still not sure what the future beholds especially once the Walmarts, as expected, make their forays into India. Even the IT retailers (leaving apart the large electronic LFRs) are uncertain about the impact.

No doubt, the recent Indian government's decision to allow 51% FDI in multi-brand retail has definitely sent some shock waves amongst the IT channel partners who have multi-brand retail outlets (MBOs) in the country. They are of the opinion that this move by the government is totally uncalled for and they highly condemn this decision.

Showing his concern over this development, KL Lalani, MD of Kolkata based Lalani Infotech and also the owner of one of the country's largest retail outlet, ‘Lalani e-tech city', says, "Though I believe that this decision will not affect the IT products selling in the country to that extent, it is like going back in the pre-independence era and allowing Eastern India Company to do trading in our country. These large retailers are the kings of the global market. However, we should allow them only after putting some restrictions on their mode of operations in the Indian market. It might be an opportunity for the Indian IT market, as these big retailers will bring in hi-tech products here which the country is looking for. But at the same time, it is a threat for MBOs like us. We fear that these biggies might acquire us in the long run and that's why we have to keep a close watch on their strategies and then plan our approach accordingly. I guess we can survive only if we open our MBOs in multiple cities across the country. We will sink until and unless we open at least 30-40 outlets in the Indian market."

Seconding his thoughts on the same, Hasan Abdul Kader, CEO of Chennail-based CCS Infotech, added, "Already with the entry of the LRF stores, we can see large number of small time retailers downing the shutters. With foreign companies entering the country, it will pave the way for the available of IT products at cheaper cost as they will have their billing done in huge numbers directly from the vendors. In fact, the strategy of the international retail stores is a different ball game. They will calculate loss for the first three years from installing a shop and sell products at a cheaper rate which will obviously affect the small timers. Later, after huge number of shops are closed, they will increase the rate."

Though A Singh, MD of Delhi based Computer Land and one of the largest retailers of the capital, feels that the Indian government has taken the right decision to allow 51% FDI in multi-brand retail, it is definitely the MBOs who are going to be at the receiving end and not the single brand retailers like him.

Singh asserts, "There are two types of IT retail - single brand and multi-brand. With this decision of the government, the multi-brand stores will get drastically affected. It is because the end consumers will get a much better experience at the big multi-brand stores as compared to what we have in the country today. Single brand stores will continue to run as it is. It does not create any difference for people like us, as we have single brand stores in the market. The government has taken an absolutely right decision, as this is not limited only to IT retail. Besides, these big retailers would be able to service the customers in a much better way in comparison to the current multi-brand small retail outlets in the Indian market."

On the contrary, Sanjeev Walia, MD of Jetage Computer Traders and one of the large channel partners of the northern region, believes, "It is a good news for end-consumers who will get more and more of variety at a much better cost. The national distributors will continue to flourish, as these big retailers will have to buy from the NDs only. But a layer below the NDs will get highly affected by this decision. It is definitely a big threat to the channel partners because people will get products at a cheaper cost from these biggies. Eventually, we might see the small IT multi-brand retail stores shutting down in the country. However, these big retailers won't be able to provide the kind of service to the customers which a small retailer gives in the country today."

On the other hand, there are partners who have welcomed the government's move to allow FDI in retail. They believe that this will create a plethora of opportunities for the overall retail sector in the country. Apparently, they feel that it is the present LFRs in the country who are going to suffer rather than the small IT retailers.

Echoing his views on the same, N Patanwala, CEO, Bengaluru-based Alpha Consumables, says, "I do not think that the entry of global retailers will do any change in the regular functioning of the channel partners like us. And already we are in the era where big Indian LFR stores had entered the market and we are still running the business. However, the entry of a foreign brand may be a tough fight for the Indian LRF stores but not us."

Keshav Madhav, CEO, Vidur & Company, added, "As far as IT industry is concerned, there won't be any effect of FDI in multi-brand retail. At this moment, status quo will be maintained. IT channel partners will not bear the brunt of this development. In our case, the business will run as it is."

"It is definitely a positive sign for channel partners like us. This decision by the Indian government will boost the entire retail business in the country while creating humongous opportunities for us," opines Suneil Nevagi, director of Pune-based Newton Software.

What are the challenges for Indian IT retailers today?

- Price Wars

With the increase in price wars due to the entry of new players in the market and increase in manufacturing capacity by some original manufacturers, the profitability and margins of the companies are adversely affected. Hence companies need to increase focus on product / store differentiation to address various segmental specific needs

-Lack of Distribution Networks and Logistics Management

Getting stock into a store in India is a massive challenge given the poor city roads and complex intra city transportation regulations , high cost of moving goods between starts, inefficient storage ( e.g. small store backrooms owing to expensive real estate). It is of utmost importance to design an efficient network. Transportation, including railway systems, highways has to meet global standards. Airport capacities, power supply, warehouse facilities and timely distribution are other areas which need to be enhanced. The distribution network is also highly fragmented and is very poor in semi-urban and rural areas.

-Presence of Gray Market in Consumer Electronics

Presence of gray market in consumer electronics products, especially in DVD player, music players is definitely eating into the sales of the retailers. Counterfeit products are present across a wide range of products.

-Increasing Awareness of the Indian Consumers

With the increase in access to Internet information, and availability of wide range of choices, consumers have become quite smart. They want the product that is easy-to-handle, good in quality and low in price. Most importantly, consumers want some guarantee for the product that they are buying. The role of electronic companies doesn't end on the sale of the product, but continues till the end of guarantee period.

-Trained Manpower Shortage in India

There is lack of talent in consumer electronics retailing. Retailers need to spend heavily on training its sales force to match the expectations of the Indian consumers both in terms of technical knowledge and soft skills.

Diminishing Health of US Tech Retailers: Why They are Looking at India

The US consumer electronics and technology retail industry has endured severely fluctuating fortunes in the last decade. A swiftly changing electronics market landscape, continually reshaped by the forces of continuous product innovation and change, is forcing the entire tech retail industry to confront challenges across multiple fronts. These issues include the following:

The advent of the frugal and sophisticated US consumer, thanks to the "Great Recession."

Debilitating price wars fought by three distinct retail trade formats - discount vs. pure-play vs. online retail.

Significant competitive advantage enjoyed by online retailers due in part to lower overhead and tax laws that have not caught up with the new rules of the retail game.

Ever-changing and demanding "millennial" consumer preferences.

These forces have left electronics retailers scrambling for cover under their onslaught. In the recent past, we have witnessed the bankruptcy of a large player, Circuit City, as well as the less-than-stellar growth of other key players. It is clear that electronics retailers or electronics retail divisions of organizations such as Best Buy, Target, Walmart, RadioShack, etc. will need to re-evaluate and re-align their strategies to face the new realities of the marketplace.

The US retail electronics market tallied revenues of $180 billion in 2010 across five key categories: consumer electronics (video and audio products); home office (PCs, notebooks, netbooks, tablets, mobile phones, etc.); appliances; entertainment hardware and software; and services.

Total sales of the Top 10 electronics retailers grew by 6% in 2011 to reach $110 billion . Absent Apple's stellar performance, the previous two business cycles (2008-2010) have been characterized by anemic revenue growth, the demise of Circuit City and flatlining in the key category of TVs. After experiencing market share gains following Circuit City's demise, the major players have essentially seen flat growth a year after the fact, indicating that revenue increases in 2009 for some major players were purely a result of the redistribution of Circuit City sales rather than incremental business gains.

Reality struck in 2010 and continued in 2011, with revenues of major players growing only by 4.5%; marginal revenue growth was driven primarily by new product introductions, such as tablets and netbooks, and not from existing product lines, as well as from an increase in store fronts and retail floor space. It is clear that shifting consumption patterns and product distribution models, especially from physical to online sales, have had a major, across-the-board impact on the electronics retailing space. No wonder, therefore all these retail biggies are aggressively looking at India to make their marks.

Top Indian Multi-Brand Tech Retailers & their Foreign Connections

Croma is today India's first, large format, specialist retail chain for consumer electronics and durables. Croma helps you shop for 6000 different products accross 8 categories in a world class ambience.The Croma retail chain is owned by Infiniti Retail which is a Tata sons 100% subsidiary and set up its first store in 2006, which was 20,000 sqft and had an initial investment of `3.5 crore, hosting various brands in household durables and consumer electronics. Though it strategically had an alliance with Australian international organized retailer, Woolworth (the $55-billion Australian retailer, which has been in the business for 85 years and is best known for its supermarkets known as Woolies) for back-end operations, the current status is not very clear.

NEXT Retail India is a subsidiary of Videocon Industries, Ltd and opened its first retail electronic store at Indore in 1999. Today, NEXT Retail India Ltd has more than 300 outlets across 16 states with a presence in 145 towns spanning metros; a giant in the organized retailing of consumer electronics, and home appliances. NEXT has more than doubled its last year's turnover in the current financial year. Their plans ahead are more ambitious with a targeted turnover of `1,800 crores for next year with 600 plus outlets. There have been talks about Best Buy partnering with NEXT to come into India.

Reliance Digital is your one stop shop with cutting edge technology for the entire range of household electronics, appliances, computers, gaming and telecom products. With over 150 international and national brands and over 4000 products, Reliance Digital has the largest display of models to help you find the right solution that fits your lifestyle. The range at Reliance Digital spans, Audio and Video products (TV's, DVD players, Car Audio players), Electronic Musical Instruments and Digital Cameras, Gaming Consoles and Games, Computers and Peripherals, Mobile and Fixed line instruments, as well as Durables like, Air Conditioners, Refrigerators, Water Purifiers, Kitchen and Home Appliances.

E-Zone, an electronics specialty store, which has several brands all under one roof, was launched by Future Group, in 2007 at Lucknow. They have an interesting store format which consists of three dedicated zones - Liberation Zone, Experience Zone and Home Zone to meet the electronic needs of the entire family. E-Zone competes with Croma, by offering the best deals and low prices and is positioned more towards the lower-middle and middle class customer segment. The company has expanded to 40 stores, all over India. Unsubstantiated reports have come that Best Buy, Sears, Radio Shack and others are all looking at Ezone to make their Indian foray.

One major US tech retail giant (primarily in office automation) who is already in India even before the FDI in multi-brand retail was announced as a olicy. Staples is the world's largest office products company and a trusted source for office solutions. It rovides products, services and expertise in the categories of office supplies, technology, furniture, Copy & Print, and cleaning and breakroom. Staples was founded in 1986, and today has annual sales of $25 billion, ranking second in the world in eCommerce sales. With 90,000 associates worldwide, Staples has a presence in more than 26 countries throughout North and South America, Europe, Asia and Australia - bringing easy to offices and consumers everywhere. Staples headquarters is located outside of Boston, Massachusetts.

Viveks is one of South India's oldest consumer electronic retailer founded in 1980s, which set up a retail outlet at Chennai, with humble beginnings of housing fans, radios, fans, mixers, irons, heaters and other household equipments. Till 1994, it had set up only 3 showrooms, however, with a strategic initiative for rapid expansion, it established its dominance in the two states on Tamil Nadu and Karnataka with 51 showrooms covering a retail space over 1,75,000 sq.ft and boasting of a group turnover of `400 Crores and with wide product offerings. It plans of setting up of 50 more showrooms in south India.Vivek Limited is a professionally managed public Limited company carrying two retail brands - viveks, Jainsons adding to the formidable strength of 1,000 employees. Vivek Ltd is one of the most leading and respected consumer electronics and home appliances retail chain in India. Vivek popularized several brands by creating visibility and has the distinction of being a market leader and trendsetter with continuous support from the principal companies. Reliable services are ensured through cordial customer relationships. CII and Mickinsey raved about the Viveks brand as "more trusted than the brands it sells".There was a buzz few years back thatBest Buy may enter into a partnership with Vivek Ltd to enter India, but nothing more has been heard till date.

Incepted in the year 2000, Lotus Electronics Supermarket is one of the largest integrated consumer electronics, home appliances and IT products stores in India. It enjoys the position of being the pioneer of concept stores in the field of consumer electronics, home appliances and IT products in Indian retail industry. As the industry leader of the region, Lotus is dedicated to continuous innovation and bringing an exciting new shopping experience to its customers. Today, it operates out of 7 stores in Indore, Bhopal, Ujjain and Raipur covering the states of Madhya Pradesh and Chhattisgarh.

Mobile Phones Specialty Retailers

The main players in the mobile phone retailer market are The MobileStore, UniverCell, Cellucom, etc. The MobileStore currently has more than 1050 outlets and plans to have a network of 2500 stores by 2010 across 650 cities, covering virtually every major town in every state across India. Chennai-based mobile retail chain , UniverCell, currently has 300 company-owned stores across the four southern states including 70 in Andhra Pradesh, and is trying to touch 400 stores through the franchisee mode. Cellucom which hosts mobile and laptops, first outlet was opened in January 2007 at Gurgaon. Currently there are 120 stores across 15 cities including top four metros. These outlets cover the entire value chain in formats like stand-alone stores in Malls, as well as Shop-in-Shop within Shopper's Stop, Lifestyle and other large-format chain stores

No FDI In Online Retail

Even as the intense political drama over FDI in multi-brand retail is being played out in the corridors of power, Mamata Banerjee will be happy to note that the Government of India has rejected FDI at least in one area, that of e-commerce. Unfortunately, the significant consumers of e-commerce in India belong to a constituency that is pandered neither by Mamata nor the likes of Mulyam, Nitish and their ilk. Hence the news that the GoI has rejected FDI in e-commerce has not grabbed headlines or primetime eyeballs.

The Indian Government which allowed FDI up to 51% in multi brand retail trading last week has decided not to allow companies with FDI to sell their products through the Internet in India. This decision puts curtains on the plans of Amazon and other foreign e-commerce companies entering India. The Government has also prevented foreign retail companies that enter India from selling online. The provisions are part of the notification by the industry department on the FDI policies for retail. The notification says, "Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading."

Besides, this provision also applies to investments by foreign venture capital and private equity funds in such ventures. E-commerce firms used to raise funds from foreign Private Equity and Venture Capitalist firms showing that the money was raised to power the back-end logistics of the business venture and the e-commerce. If the FDI norms are were eased, startups could had have a single corporate entity for which they could directly bid for funds. However, this move by the Government ensures that such ease in funding is unlikely as of now.

Though no political parties are overtly concerned about the ramifications (beneficial or otherwise) of this move, it could provide succor to many of the IT channel partners who have ventured into retail. Most of the multi-brand IT retailers are worried about the impact of FDI; they fear that once the Best Buys, Sears or Radio City-s come directly into India (or through partners) they might eventually get wiped out.

On top of that, they were already concerned about online sales where tech vendors have been able to push products to consumers at much lower prices by bypassing the multiple layers of the channel ecosystem. While this may be initially beneficial to consumers, in the long run it would impact them as the demise of the IT channel would mean consumers completely at the mercy of MNC vendors and retailers. This should be one decision of Manmohan Singh that Mamata must applaud; while whether it is beneficial overall for the country only time will tell, at least this has given temporary oxygen to the Indian IT retailers.

Rajneesh De & nivedan prakash

with inputs from team dq channels

(rajneeshd@cybermedia.co.in)