Accelerating SME integration in Global Value Chain through progressive retail policy

MSME

 

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The advantages and disadvantages of opening the borders for foreign retailers to establish their stores in India have been debated at length. The advantages outlined are benefits of having an organized retail sector, healthy competition, quality control and waste reduction. Counter arguments include disadvantages of higher prices with higher inflation, limited job creation etc. But the biggest threat perceived is that the millions of Kirana stores will be forced to shut down, unable to compete with the foreign giants. 

In my family, I am the third generation buying from the same local Kirana store. Keeping in mind my current profession as Principal Investment Specialist at Invest India, I think there are more advantages with FDI in retail. 

The world is witnessing the biggest human migration today – 30 people are moving from rural to urban India every minute! The middle-class population is on the rise – 550 mn by 2025. India is expected to a have a $3 tn consumer market by 2025. This provides a huge array of opportunities for the co-existence of the unorganised and the organised sectors. Also, there are various ways through which the organised sector can help the unorganised sector grow. Below are a few examples.

Integration into the Global Value Chain

A lead firm contracts many smaller local businesses to supply it with construction, transport, cleaning, manufacturing and other services. A big retailer like Walmart needs space to build its warehouses and needs people to manage its warehouses, distributions centres, and staff to ensure best of consumer services. All these naturally generate employment. Discussions with top domestic and foreign retailers reveal that an organized sector leads to 1:8 direct to indirect employment and that for every 300-sq. ft. of retail space 1 person is employed.

As an illustration, 10 retail companies being facilitated by Invest India have already created 171,055 direct jobs and 705,950 indirect jobs. A person who might have lost a job as a delivery boy in a Kirana store now may hold a full-time job in an MNC, being part of a company’s payroll. This automatically draws the other benefits of health insurance, overtime pay etc. Some examples of how MNCs are helping the unorganised sector in India are: 

o Amazon’s Project Udaan: Amazon.in appoints offline associates across retail points like kirana stores, medical stores, and mobile shopping outlets and provides them with a PC-based website. The store owners are trained to help customers find and buy products of their choice while earning a commission in the process. The project operates with 2,429 stores across 267 cities in 20 states. 

o Walmart’s Model ‘Mera Kirana’: Shares best practices with members who are SME retailers, and advises on various aspects of using low-cost modern techniques and processes such as assortment planning, layout and fixtures, safe food handling etc. 

o IKEA’s Disha Program: Touches the lives of one mn women over a period of 3 years by providing the knowledge and skills to start their own business. 

Apart from big players, start-ups are also seen helping the Kirana stores to become more organised. 

An article in yourstory.com introduced me to Nakkyun Chong from South Korea, who worked with SK planet before (a subsidiary of SK Telecom). He introduced Kirana 11 in Bengaluru which follows a hybrid model of B2B2C and Hyperlocal. The start-up connects Kirana stores to customers and distributors and helps small sellers adopt digital solutions to their shop management. A hyperlocal model in retail is about getting the ordered products from local stores and delivering it directly to the customer. Consumers can place an order from a Kirana store on Kirana11’s website or app.

The entire planet becomes a market for an artisan in the rural village of India to sell her crafts! A craftswoman weaving a shawl from a loin-loom in the North-East could only supply her product to a neighbourhood market or a middleman. But with the introduction of e-commerce, the craftswoman has overnight become an online seller and the world is her oyster. Whilst a Flipkart reaches her product across India, an Amazon or an e-Bay reaches her product across the globe! 

The online marketplace not only gives her the global outreach but also the necessary marketing and branding that her product deserves. Today, on an average, 45% of the sellers to the MNC retailers and online marketplaces are SMEs or from Tier 2 and Tier 3 cities in India. With the benefits indicated, the current FDI policy may be enhanced with 100% FDI in E-Commerce in an Inventory Based model for products that are made in India exclusively.

A farmer gains 10 times in earnings through direct sourcing!

India today suffers from an inefficient supply chain. Too many middlemen, high priced logistics and lack of a proper supply chain make a farmer reap very low profits. As an example, sourced from the CEA of Rural Development, a tamarind farmer used to get Rs. 8 per kg of tamarind sold for which a buyer paid Rs. 170 per kg. A mere 5% of what the consumer paid reached the farmer. 

With Dabur deciding to make seedless tamarind for the consumer, the bulk of the tamarind was directly sourced from the farmer. With the reduction in middlemen and faster movement of goods, the farmer now receives Rs. 80-90 per kg for the Rs. 170 per kg that the consumer pays for a superior product of seedless tamarind. 

Tens of thousands of farmers sell directly to MNCs such as Pepsi, Hindustan Unilever, Nestlé etc. Farmers are reaping huge profits from 100% FDI in the food processing sector. Based on which 100% FDI in Food Retail is a reason to thoroughly support. Allowing the sale of 25% of non-food items in a food retail store will be a matter of convenience for the consumer. A policy change that would be welcomed by the foreign investors as well. 

Today, most SBRTs and Multi-Brand Retail Traders (MBRTs) are comfortably meeting the 30% local sourcing requirement, and have even achieved up to 60-70% local sourcing in sectors such as textiles.

A Kirana store did not shut down with a Waitrose outlet next to it.

A Nilgiris outlet (now Waitrose) opened in my locality a decade ago where a Kirana store has been existing for over three decades. Did the Kirana store run out of business? The answer is no and today both are doing equally well. 

As a consumer, we have two major types of shopping. A one-time shopping of monthly provisions and the second type of picking up one or two items of interest during the month. The monthly provisions are mostly sorted from the Kirana store. This could be attributed to the habit or convenience of not manually picking up the long list of items from the store or low price of non-branded items like toor dal and boiled rice. But during the month when we want a family pack ice-cream or the need for a branded personal care product, then it’s a quick halt at the Waitrose outlet.

A report from BCG indicates that whilst organised retail grew by 933% in a decade - $6 bn in 2005 to $62 bn in 2015, the unorganised sector grew by 177% ($202 bn in 2005 to $560 bn in 2015). It is also projected that by 2020 whilst the organised retail might grow at 190% reaching $180 bn, the unorganised sector is expected to grow by 60% to $897 bn. So, in effect, the pie is just getting larger from $208 bn (in 2005) to $1.07 tn (in 2020) for more players to equally succeed and profit from. 

Bearing witness to this increasing pie - a locality that had independent bungalows with 500 families, over the decade has been infested with apartments with over 1500 families in the locality! This calls for more supply to meet the demand. 

The increase in footfall has also helped small vendors to establish their business next to the Waitrose outlet. At the parking lot – a lady vendor successfully sells her basket of jasmine flowers and betel leaves every evening. A young lad makes his daily income attracting the youngsters with his pani-puris. 

FDI in retail, as seen in economies such as China and Thailand, has yielded multiple benefits. Direct sourcing, gainful employment, infrastructure upgrade etc. - leading to Inclusive Growth: Parallel growth of the organized and unorganized sectors.

As to allowing 100% FDI in MBRT, I feel we need to give time for the sector to mature. We need to build a stronger local competition, build better infrastructure, build a more efficient supply chain which will then help us open up MBRT to 100% FDI.

The success of FDI in retail in countries such as China, Thailand, and the Philippines have positive learning lessons for India, giving us confidence in the recent easing up of FDI norms as announced by the government.