Why not an FDI, when the sector is growing!
Why not an FDI, when the sector is growing!

Arvind K Singhal, Chairman, Technopak has vehemently voted for opening FDI for multi brand retailers. In a conversation with Rosy Ngaihte he stressed that the government is illogically dragging its feet on giving the retail sector an industry status.

 

Rosy Ngaihte (RN): Was the retail sector actually affected by the recession?

 

Arvind K Singhal (AKS): There was no recession in the retail sector. The Indian economy grew last year at 6.7 per cent and hence recession is a very strong term to use. If you check the data of consumption in every category – clothing, food, automobile, telecom etc. it has been positive. During that period, the retailers became more cautious and started focusing on profitability rather than on growth. Also, the developers were not able to raise capital as they had expected and as a result many of the projects for retail space like shopping malls got delayed that in turn slowed down the growth process. Therefore, the retail sector witnessed a slowed growth rate but there was no recession.

 

RN: What kind of consumer buying behaviour have you observed post the recession?

 

AKS: The consumers are looking for more options including cheaper ones, their spending can be categorised as need based and aspiration or lifestyle based. The need based goods could be food and grocery; clothing and footwear; and consumer durables and electronics, where they are looking for very good value options. They are not willing to pay premium on these products and are seeking price preference from retailers.

 

While, in aspiration based categories, people are ready to spend more money on food services, health and beauty; education and learning; leisure and entertainment.

 

RN: Recently a lot of Private Equity participation has been seen in the retail sector, how positive will it be? What are the other convenient means through which retailers can raise funds and how easily they get access to bank loans?

 

AKS: I see the alliance to be very promising. The funds available will help the retailers to expand and grow, which will further help in growing the consumption. The scenario could look even better if the government relaxes the rules on foreign direct investment as the private equity money, which is coming from the international sources are not allowed to be invested in the Indian retail business.

 

The bank loans are not an ideal way to raise funds for retail businesses because as far as the banking system is concerned they would normally give investment against collateralised assets. In retail business, there are a very few assets which belong to retailers. Usually, raising private equity or venture capital or public money is the ideal form of fund raising.

 

RN: According to the DIPP papers government is considering to open the FDI cap for multi brand retailers, what new avenues will it open for the retail sector?

 

AKS: I think, if it is opened it will increase competition for sure and therefore, some people might not want that to happen. However in reality, it will turn good for the Indian consumers the moment foreign companies are allowed to own their businesses.

 

It is time to open the floor for FDI in retail sector, for example, considering companies like IKEA, they have built their business model on the basis of very strong intellectual property. And hence they would not like to share their IP with a partner in India. Likewise Google also operates in India, the government does not say to have a joint venture with an Indian company, then, why the norms are for the retail sector. It is illogical, let the companies decide for themselves whether they need a partner or not or what kind of equity holding, if any, should be there.

 

RN: Today every retailer mentions of opening its store/outlet in tier I and II cities, what is the success rate from these cities?

 

AKS: It is not about cities, it is more about the business model. Consumption is certainly happening all across India, in some places it is more while some places witness less consumption. But depending upon the business model, somebody could even be successful in a city which is ranked 500th in the overall spending. All you have to be cautious about is, whether your business model is suitable for the top five cities, top fifty cities, top five hundred cities or top five thousand cities.

 

RN: What is the current retail trend?

 

AKS: There is nothing like a single trend because opportunity is emerging in every spectrum of consumption starting from luxury to the very mass. Today, the market opportunity is much broader than it was ten years ago.

 

In developed countries where the economy is not growing much or facing a slowdown the retailers are facing a bigger pressure like cutting cost or coming out with cheaper products but, as far as, India is concerned they only have to keep cost under control. As consumer spending is increasing there is not much competition among retailers as long as they keep their business model right.

 

RN: What challenges are faced by the retailers with respect to supply chain and logistics management? How do you think the issue can be addressed?

 

AKS: The supply chain and logistics are certainly challenging when front end retail comes in. The reason why an investment in the supply chain and logistic has not taken place is because the front end is very fragmented. I can put up a very phenomenal supply chain but for whom, not for an independent kirana stores. Either I will require large customer base or I will need cash-and-carry who will act as front end for the kirana stores otherwise supply chain investment will not take place.

 

RN: How are the retail rentals currently as retailers are still cribbing over the rental issues?

 

AKS: The retail rentals are still very-very steep. Partly, it has to do with the inefficiency in the real estate sector. It is high time now to reform the real estate like improving the legal availability of land and improving the FSI (Floor Space Index) or FAR (Floor Area Ratio) availability.

 

In India, the government sits on every prime land exempting public sector entities and defence. If a part of those lands are made available for putting up new shopping destinations, it will help in reducing the price of the rentals and the price of the commodities as well.

 

RN: What HR-related issues are faced by the retail sector?

 

AKS: There is an utter lack of training and I think retail sector has to pick up a certain scale to be able to invest in training. Normally, it is the other way round that first you train and then put up a business. But there is a cost to training, therefore either somebody else should train them or the sector should be allowed to expand and grow because as it grows it will have the resources available to train more people.

 

RN: Why do you think the government is hesitant to impart the industry status to the retail sector?

 

AKS: I have no understanding at all and it is quite illogical according to me. The government should be encouraging efficient distribution in retail, without worrying about who owns what. In the last ten years, the government has been dragging their feet on this issue without articulating any reason. They simply call it a politically sensitive subject but they do not explain what the sensitivity is all about and whether it is backed by a justified data.

 

 

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