Will companies benefit from FDI?::Business Line

Retail stocks have been partying on news of the Government permitting foreign direct investments in multi-brand retail. But what will the opening up of foreign investment bring to companies in the listed space?

While it may be early days yet, companies do stand to benefit in the long term in terms of back-end infrastructure and capital inflow. However, their challenge will be to work around the restrictions on location and build up economies of scale.

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TYPE OF RETAIL

Foreign entities can invest up to 51 per cent in multi-product retail — retailing various products bearing different brand names under one roof.

Multi brand retail could refer to specific product segments such as electronics or furniture, or it could be the quintessential supermarket that bundles farm produce, groceries and household items under one roof.

It is this segment that will attract the most attention as it has the largest market potential in India. Indian retailers who do operate in this segment are Pantaloon Retail’s Big Bazaar, Trent (Star Bazaar), Shoppers Stop (HyperCITY), and CESC (Spencer’s Retail).

LOCATION RESTRICTIONS

One significant constraint for existing retailers hoping to sew up FDI deals would be the location restrictions. Foreign retail is only allowed to open stores in the most populous cities — as far as possible, retailers should stick to those cities with a population of over 10 million. States also have the last word in permitting entry.

Existing stores of retail players are spread across the country and are unlikely to comply with these location criteria.

To comply, they would either have to shutter some existing stores or open a new chain altogether with the new partner. Even if they do, the question is if the foreign player will be keen to invest, given that multi-brand retail requires immense scale to be economical.

According to Rachna Nath, Leader, Retail & Consumer, PwC India, such economies could hinge on the saturation and maturity of the city. It could be possible for retailers to attain scale by setting up many stores in a particular regional cluster — say, Maharashtra, Rajasthan and Andhra Pradesh. These are the States that have flashed the green signal for entry of foreign retail.

For the existing retailers, the restriction on store locations for foreign players is a big plus. With these limits in place, new entrants are unlikely to pose stiff competition to listed retailers operating supermarkets and hypermarkets. These players have also already expanded to smaller cities.

BETTER SUPPLY CHAINS

The rules say that half the foreign investment should be used to build supply-chain infrastructure, completed within three years. This could be a big benefit, given that Indian retail chains have so far lacked the capital and incentive to invest in supply chains. An efficient back-end set-up could lower costs for the entire set of retailers in a particular business. Given that hypermarket business operates on low margins, any cost savings will help plump up margins.

But there are roadblocks to this — restrictions in movement of farm produce between States, taxes such as octroi, and the sheer size and fragmentation of the agricultural market. Geographical limitations also throw into question effectiveness of the supply chain. Restructuring to create entities to work in the current framework would need a lot of thought, but managing an efficient supply chain, considering that only nine States have given approval, will pose a big challenge, according to Rachna Nath.