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Posts Tagged ‘Foreign Direct Investment’

IBM Professor of Operations Management and Information Systems

IBM Professor of Operations Management and Information Systems, Kellogg School of Management.

Following our previous post on FDI in India, we are happy to post an interview with Prof. Chopra who is the IBM Professor of Operations and Information Systems at the Kellogg School of Management. This interview will be published in two parts, touching various aspects like impact on the local ‘kirana’ stores and the evolution of the indian shopper’s mindset.

India @ Kellogg: Prof. Chopra, thank you for agreeing to do this interview for the India Business Club’s magazine India@Kellogg.

Prof. Chopra: My Pleasure.

 

India @ Kellogg: We would like to begin with an overview of Foreign Direct Investment (FDI). Could you tell us about the history of FDI in India and its significance?

Prof. Chopra: FDI in retailing has been allowed for a fair amount of time now. I do not remember the exact year when it was first allowed, but it has been allowed for at least 10+ years for single brand retailers. For example, if Zara wanted to open a retail store in India, they could have opened a retail store, but what was not allowed was Multi Brand Retailing. I think the logic used was that a lot of Indian retailers, depending on how you count the number could range from 10 to 50 million businesses, were very small. So I think the feeling was that we should give an opportunity for Indian brand retailers to establish themselves (before opening up the country to foreign multi-brand retailers).

Initially, multi-brand retail was allowed as cash and carry. The idea there was that the individual retailers might benefit from them. I think that was allowed almost at the same time as FDI was allowed in single-brand retailing. In 2011, the government of India approved Multi Brand Retailing and backed-off, and last year again it was introduced and approved by the Upper House as well. In the past 10 years, many large Indian companies have invested in Multi Brand Retailing with varying degrees of success. This includes Futures Group, a big player, Reliance, Mahindra, and several others.

 

India @ Kellogg: Why now? What makes India positioned to have Multi Brand Retailing in India at this time? Are Reliance and Big Bazar ready to compete against Wal-Mart for example?

Prof. Chopra: I think there is a more fundamental question (at play here): To what extent will Multi Brand Retailing succeed in India and what form will it take? After all, we are actually seeing the decline of big-box and Multi Brand Retailing in the US. Borders is bankrupt and liquidated, Best Buy, arguably in the next 3 years could be bankrupt and liquidated. These were the posted children of Multi Brand Retailing of the traditional sort. Let’s see in the US who is surviving. Costco is doing very well, Wal-Mart is doing very well, Ikea is doing very well, as is Amazon. In India, industry’s investment in Multi Brand Retailing has met with limited success. Some of them have deep enough pockets and they have hung in there but I will give you an example. My family home is in Jaipur where I saw that five grocery stores (supermarket) run by various Indian houses were opened. Over a few years, only one, Reliance, survived. Meanwhile, the small grocery shop near my father’s house has tripled in size. It used to be very disorganized, but now it is very organized and it has got fresh coat of paint! So I’d say the question to ask is what is the form of retailing that is likely to succeed and in particular, what is the role that FDI can play? I think there are certain companies and certain areas where foreign retailers can do very well. Just to give you an example, I think Ikea is one of them. Why? I think it brings products that people are not looking to buy on a weekly basis. It also is going to bring a price point that is going to be significantly lower than the prices currently available in India for that type of product. That sector in India is not very organized yet so I see a store like Ikea being very successful in doing that. On the other hand, when I look at Futures Group, I think some of the challenges they have faced is very high cost of real estate and great difficulty of transportation (for customers). This doesn’t mean people don’t go but the challenges with regard to transportation make it somewhat less likely that people would be travelling long distances for products that they need frequently.

I know the question you asked is why FDI now? I’d say that the experiments have been tried and at this point I am not that concerned about the Indian houses. If they don’t have their acts together they shouldn’t survive. But it seems that the existing small retailers can not only survive but also thrive. I gave you the example of the retailer across the street from my father’s house, and he has started to develop.

 

India @ Kellogg: You mentioned the example of Ikea, I can see them benefiting and being profitable in India but does that lead to a decrease in the creativity that is brought by the local furniture-wallah?

Prof. Chopra: I think not. If you start looking at what Ikea brings to the table, it does not produce furniture that any of us is hoping to pass off to our grand children. Ikea really produces furniture, which is inexpensive and for people in transition. Whereas, there are many talented local furniture makers in different parts of India who produce a very different type of furniture. They produce furniture with a lot of artistry and it is meant to last a long time. What is missing in India, if you ask me, is the options. Who you call the furniture-wallah, cannot compete with Ikea on this side. Similarly, Ikea will find it hard to compete on the other side. Part of my thesis is that when you think of retailing, you have got to think of mass products and specialized products. And they need to be handled differently. And this is one example where I think a foreign retailer like Ikea can handle the mass products better than anything existing in India. But I can also think of other examples where the local kirana (grocery) store can do much better than the organized grocery store to handle the most frequently used items. I’d say the major reason why it works is because that’s not a purchase we do every week. I may be willing to drive outside Delhi, if that’s where Ikea locates, to get the lower price point. On the other hand, to buy my daily groceries such as rice or vegetables, I am not going to drive 4 miles.

You have to look at some parallels here: India bypassed certain aspects of telecom infrastructure. I think in retailing, we should be thinking the same way. We should look at what worked and what did not work. So today, how do we watch movies? Well, three ways – of course there is that Netflix type model which might have me getting the DVD at home or streaming, but there is also Redbox, where I just go to a local vending machine. What is the characteristic of the local vending machine, it is very low cost and it is very close to me. So I want to watch something inexpensively and quickly. What are the types of movies they keep? They really rent you hits, it is the fast moving stuff, the titles that everybody wants. Now, local Indian kirana store is a version of a vending machine. It just happens to have a human instead of a machine, but it does the same thing. If you look at the scale, they are the same. So if you look at here what eliminated blockbuster, it was not just Netflix, it was Netflix and Redbox. So I would ask the question when we think in India in terms of retailing, can a combination of our small local retailers for a lot of very common producers plus something like a Flipkart, a version of Amazon or several versions of Amazon owing to its sheer. But with that combination in place, would you need the best buys of the world? Would you really have to worry about some for foreign player coming in and setting up a big box store, which arguably in my opinion, will always see limited success in India? Of course, for certain product categories (e.g. Ikea) the situation will be different.

 

India @ Kellogg: We were puzzled who Wal-Mart might target – if they stay too close to city, they would have high real estate costs which may offset their profits. But if they go too far out of the city, people may not be willing to travel very frequently.

Prof. Chopra: You know where I see this functioning is parts of urban India. India, if you think about it, is not a tall country, that is from a real estate perspective. So things tend to be more spread out but now there are certain parts of India where things are going vertical. If you ask yourself which are the areas where Big Bazars succeed, I could say that in setting like that I can see a Wal-Mart, or some version of that, being successful because you have a large enough density. Landscape has changed – so you actually don’t have to travel a long distance from where you are – part of Gurgaon looks like that. My guess is that parts of Mumbai may look like that. But this is only a fraction of India but in large parts of India I just don’t see it being very effective. This does not mean that a store like that has not role. Going back to my parent’s home in Jaipur, one of the big boxes has survived, but there was a time when there were four of them. It is a combination one of these plus a whole bunch of smaller retailers that survived.

 

India @ Kellogg: This is very interesting, if what eventually may pan out is that these big box retailers only have a limited presence, what about the Indian government’s hopes of increasing growth and development through FDI? We are reading in the news growth has slowed down, inflation is high and FDI is expected to help?

Prof. Chopra: So in my opinion, which is not the most informed opinion or a deeply researched conclusion, FDI and Wal-Marts of the world can help, you have to think about the fundamental issues and the two parties that would matter in India – one is the small farmer and other is the small retailer. The fundamental problem is that the intermediaries control the supply chain. So for example, if you look at a farmer, he comes and sells to mandis (large open markets) and there are many parts of India where it is a requirement that if you are a retailer, you can only go and buy from the mandi. There’s a logic behind that and it made sense post-independence. There are lots of small farmers and how are they going to figure out what is the best price? So the idea was that if we create a market where buyers and sellers are coming together, price discovery should occur. This worked for some time but it has changed a lot because these mandis are controlled by the intermediaries and cartels have formed of a few intermediaries. So there is no price discovery happening because the intermediaries know everybody has to come to the mandi, so we will buy from the farmer and sell it to the retailer. If there are a few of them then essentially the role play disappears. So big chunks of the profits are kept by the intermediaries. The real issue is to break that down. Large players like Wal-Mart may help in that process. Initiatives like e-chaupal have the potential to offer a better price discovery to the farmer. Plus there is a second part, which I think is not as well developed in India. It is how can we then deliver this efficiently to the small retailer in India. I think arguably it should help the small farmer to the extent that there is direct purchasing.

 

India @ Kellogg: There is the other issue of sovereignty. India is built on self-reliance. How might that change with FDI?

Prof. Chopra: There are pros and cons to being self-sufficient. I’d say Japan is a good example to look at. As a child, I remember growing up reading about how the Japanese stopped consuming some products just because all of it had to be imported. I think there are some clear benefits to self-sufficiency, but there are huge benefits to competition as well. For example, I would be completely honest, may be I am in the minority, but I personally see absolutely no problem if China is willing to produce something much cheaper and ship it to India. However, coming to FDI, with the way the transportation costs are rising, nine out of ten times foreign retailers will be better off sourcing from India. It’s a no-brainer, because you have cheaper labor and there is less to transport. So I am not particularly worried that if Wal-Mart goes to India, there are going to get detergent from the US and sell it in India. There are terrific detergent manufactures in India. So I don’t particularly see it as hurting from a products perspective. I see it as benefiting because these retailers will bring deep knowledge about how to manage supply chain, how to move products efficiently, they bring deep knowledge in that regard, so I see that as benefiting India.

 

India @ Kellogg: We agree, but where we were getting hung up is the whole thing about killing domestic manufacturing.

Prof. Chopra: Let’s look at manufacturing. Let’s take Ikea for an example. Let’s look at where Ikea sources its products from and if it were to come to India, is it possible that it could manufacture those type of products in India. In India, price is always going to matter. I cannot see how simply by importing the product from somewhere else and selling it in India, Ikea is going to be better off then actually sourcing from India as long as that ability exists in India. It could be an in fact an opportunity for Indian manufacturers in a variety of sectors to develop the products that these retailers will need. Can India product low cost good quality products? I am confident that such capability exists. I think buyers (retailers) of that magnitude didn’t exist earlier to make it an attractive business to get into. So I understand your concerns. Personally, however, I am less concerned about manufacturers, I am more concerned about the small retailer. I actually view it an opportunity for the manufacturer. Look at India’s exports; they have grown and India’s manufacturing sector has done quite well. The last five-eight years have actually been good for Indian manufacturing. I am also not concerned about the farmers. I don’t think they will be hurt, how much they benefit remains to be seen. It is the small retailer I am little bit concerned about. If I were the government, what infrastructure need to be put into place, so that they are able to reach their full potential in terms of what they are able to provide? That’s what I would worry about a little bit more.

 

To be continued…

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