Entry of Foreign Retail Chains

Background of the Topic:

What is Retail?

Retail comes from the Old French word retaillier which means "to cut off, clip, pare, divide" in terms of tailoring. It was first recorded as a noun with the meaning of a "sale in small quantities" in 1433. Retail consists of the sale of goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. In majority of retail situations, the organisation, from whom a consumer buys, is a reseller of products obtained from others, and not the product manufacturer. However, some manufacturers do operate their own retail outlets in a corporate channel arrangement.

Retailers offer many benefits to suppliers and customers as resellers. Consumers, for instance, are able to purchase small quantities of an assortment of products at a reasonably affordable price. Similarly, suppliers get an opportunity to reach their target market, build product demand through retail promotions, and provide consumer feedback to the product marketer. Retailers are at the end of the supply chain. Manufacturing marketers see the process of retailing as a necessary part of their overall distribution strategy. The term "retailer" is also applied where a service provider services the needs of a large number of individuals, such as a public utility, like electric power, etc.

Context with reference to India:

Retailing in India:

India is one of the largest emerging markets, with a population of over one billion. India is one of the largest economies in the world in terms of purchasing power and has a strong middle class base of 300 million.

Around 70% of the total households in India (188 million) reside in the rural areas, where mostly traditional retail outlets, commonly called kirana stores exist. These are unorganized, operated by single person and runs on the basis of consumer familiarity with the owner. However, recently organized retailing has become more popular in big cities in India and most of the metropolitan cities and other big cities are flooded by modern organized retail stores. Many semi rural areas also witnesses entry of such organized retail outlets. Till now, entry of foreign retailers was restricted in Indian retail market because of the ban on Foreign Direct Investment in Indian Retail Sector. But recently, as government has changed its policy and the cabinet has allowed 51% FDI in single-brand retail, the prospects of foreign players entering India became high.

The Indian retail sector is highly fragmented with 97% of its business being run by the unorganized retailers like the traditional family run stores and corner stores. The organized retail however is at a very nascent stage though attempts are being made to increase its proportion to 9-10% by the year 2010 bringing in a huge opportunity for prospective new players. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10% of India's GDP.

International retailers see India as the last retailing frontier left as the China's retail sector is becoming saturated. However, the Indian Government restrictions on the FDI are creating ripples among the international players like Walmart, Tesco and many other retail giants struggling to enter Indian markets. As of now a lot of one-shops like Nike, Reebok, Adidas, etc have entered. However, other international players are taking alternative routes to enter the Indian retail market indirectly via strategic licensing agreement, franchisee agreement and cash and carry wholesale trading (since 100% FDI is allowed in wholesale trading). Hence today's organised retail sector consists of a lot of Foreign companies in collaboration with Indian companies like Metro Cash and Carry, Café Coffee Day, Nike, Van-Heusen, etc and also some Indian companies like Reliance Retail, Nilgiris, Subiksha, etc.

The prospect of international retail chains like Walmart, Carrefour and Ahold entering the country has enthused many suppliers and also consumers, who are looking for a wider choice and finer prices product. However there remains some opposition to allowing FDI in retail. Before opening a sector, many feels we should first look into the possible impact of transnational supermarkets on livelihood security of those engaged in small-scale operations. A few analysts report that allowing major global retail chains in India would entail the loss of several thousands of jobs as traditional mom-and-pop businesses would close down -- as has happened in the West.

Employment in Retailing:

A simple glance at the employment numbers is enough to paint a good picture of the relative sizes of these two forms of trade in India - organised trade employs roughly 5 lakh people, whereas the unorganized retail trade employs nearly 3.95 crores. Given the recent numbers indicated by other studies, this is only indicative of the magnitude of expansion the retail trade is experiencing, both due to economic expansion as well as the 'jobless growth' that we have seen in the past decade. It must be noted that even within the organised sector, the number of individually-owned retail outlets far outnumber the corporate backed institutions. The retail stores alone employ an estimated 8% of the working population in the country. That about 4% of India's population is in the retail trade says a lot about how vital this business is to the socio-economic equilibrium in India.

Scope and Detailed Analysis of the situation:

Impact on traditional Retail Industry due to