The government has taken several steps to liberalise FDI in the retail sector, but not too many global retail giants are queuing to enter the local market. Once again, political uncertainty as well as the government’s regulations for the retail sector is the key factor preventing foreign chains from making large investments in the country.
And, even assuming that these uncertainties are amicably “sorted out” over the medium term, but a slowdown in the domestic retail sector coupled with the weak financial performance of foreign retailers, would limit FDI inflows to $ 2.5 and 3 billion each year. Moreover, to be successful over the long-term, foreign retailers need to modify their business strategy to suit the local operating environment.
The biggest hurdle - political uncertainty
The government’s earlier move to permit 51 per cent FDI in multi-brand retail has so far received a “tepid” response owing to political uncertainties along with “knotty” regulations. A key regulatory obstacle; namely foreign retailers need to obtain mandatory approval from individual state governments, and currently only nine states and two union territories have given the ‘green signal’, so far.
To add to the confusion, two states, Rajasthan and Delhi, were initially permitting FDI in retail, but they did a U-turn once a new government was installed. Apart from political uncertainties, state governments have also been vested with powers to enforce additional conditions, which may further discourage foreign investments.
As a result, since the government began liberalising FDI norms in single and multi-brand retail nearly two years ago, it has only received eight large investment proposals.
Weak financials of
The difficult operating environment in India and overseas is increasingly becoming visible with sluggish growth in our organised retail sector along with a weak financial performance of several foreign retail chains.
For instance, growth in revenues of organised retail halved to 10 per cent during the financial year ’13 vis-à-vis a growth of 20 per cent during fiscal years ’10 and ’12. This trend, of sluggish growth in the domestic retail sector is expected to continue over the next two years, and it is unlikely that foreign retailers would embark on an aggressive expansion of their store network during this period.
In addition, a slowdown in western economies has also taken its toll on the sales growth and profitability of several leading overseas retail chains. In turn, global retailers are hesitant to invest overseas, at least in the short term.
The macro-economic environment in our country and overseas is expected to improve over the next few years, and that should result in greater FDI inflows in the retail sector. However, foreign retailers would need to pay considerable emphasis on their “localication” strategy, in a bid to ensure their relevance amongst local consumers.
As part of that initiative, overseas retail chains would need to pay attention to key operational aspects including pricing, product range, merchandise mix, location and store formats. Several foreign retailers have recently exited fast growing markets like China and South Korea, and that’s largely because they did not position themselves appropriately for local consumer preferences.
And, while large outlets of over 1,00,000 sq ft and located outside city limits may be en vogue overseas, but domestic consumers are often reluctant to travel long distances for completing their daily shopping requirements.
Domestic retailers, too, in a bid to overcome high store rentals, are increasingly opting for ‘compact’ hypermarkets and they vary between 30,000 and 50,000 sq ft, with a smaller product repertoire. Clearly, foreign retail chains, once they decide to invest in the local market, would need to stay a ‘step’ ahead of local consumers.