My article published in "Wealth Insight" in Jan 2012 . Reproduced below as well:
Will consumers benefit from 100 per cent FDI in multi-brand retail? The author finds the benefits are not easily visualized
If you don’t share the government’s enthusiasm for allowing dominant foreign ownership in Indian multi-brand retail, you must be a luddite – that’s what the media would have you believe. The spin doctors of the policy have simplified the issues to the level of “with me or against me” – and opposition to foreign ownership is being defined in terms of resistance to “reform”. But are the issues really as clear?
Waste reduction through improved supply chain
India’s supply chain is regarded as inefficient. This is particularly true for perishables. Improving this is one of the key benefits of foreign investment, we are told. However, a broad-brush assertion of this nature is only partially accurate. The supply chain of milk and milk products does not seem to suffer from this infirmity. Cereals, pulses, sugar, edible oil, spices too – which make up more than 24 per cent of monthly expenditure per person (NSSO study 2004) — are well handled. Fruits and vegetables seem to suffer the most, but make up less than 10 per cent of the consumption basket.
This graphic shows that per capita food loss in Europe and North America is between 280-300 kg/year. In South and Southeast Asia, this figure is 120-170 kg/year – about half! While it is true that a larger part of the waste in South Asia is in the “production to retailing” chain, it’s important to note that it is lower in absolute terms compared to the “more efficient” supply chains of Europe and North America. The loss in the “retail to consumer” segment is not even worth comparing. The assumption that foreigners do better at preventing wastage is not supported by facts.
Back-end investment is already allowed
Importantly 100 per cent FDI is already allowed in supply chain infrastructure. Actual investment has been insignificant. The DIPP (Department of Industrial Policy and Promotion) attributes this to absence of FDI in retailing. In other words, it is not worthwhile to invest in back-end infrastructure, even to service the “organised retail” outlets owned by Indian entrepreneurs – unless one owns the final retail outlet. How is this to be explained?
If the need for cold chain infrastructure is so compelling, returns on these investments should be attractive. Additionally, government incentives are available. There should be investors lining up to set up these. Discussions with large supply-chain managers – the likes of NBHC (National Bulk Handling Corporation) and NCMSL (National Collateral Management Services Ltd.) reveal that investment returns on supply chain infrastructure does not exceed single digits – unless one also factors in the appreciation in land value. Business returns are lower than domestic cost of capital, and returns are derived from speculative asset price changes. Perhaps, the issue is less to do with the availability of capital as with high land prices, and uneconomic land sizes which increase the cost of procurement and handling.
Better farmer prices – price discovery is more important
Another “benefit” that is ascribed to foreign ownership is better price realisation for farmers – at the expense of the intermediary. However, this is more a case of price discovery and its transmission.
Lately, price of processed pepper (garbled) has been lower than that of unprocessed pepper. First, this is unusual. But it does demonstrate that for commodities where there is an organised “price discovery” mechanism – through a functional exchange — the farmer is not being fleeced. In fact, today the farmer is well informed about prices across markets, and sells at a price that just leaves the intermediary with margins that equal cost of capital and transportation costs, leaving the aggregation risk to be managed by the intermediary.
Procurement issue is also about size
More losses occur due to farm holdings that are fragmented, leading to multiple handling and storage issues, than due to any “inefficiency” in the supply chain. To think that managers from ITC, Reliance and Tata’s, or for that matter, those from Olam, Cargill, or LD would not have sorted out supply chain issues if there was a way to do so, is to assume that Indian companies are poorly managed!
Yes, procurement is already 100 per cent FDI compliant – so if large efficiencies were to be gained by foreign capital, they already would have been. If despite being free to buy from India, large global retailers buy 20 times more from China, that tells you what is going to happen once they are allowed to sell in India – we will build a supply chain for Chinese products to be sold in India.
Lower consumer prices – but how?
With no likely improvement in procurement methodology, and with higher costs associated with supply chain (assuming that it is actually set up), how will the prices at the retail level fall? Perhaps by diverting more supplies to towns (cold storages will allow perishables to last longer) at the expense of rural India. But will higher cold chain storage and transport costs allow final prices for urban consumers to fall? And, importantly, what happens to the food supply to semi-urban and rural areas – they are left with less food diversity and poorer health perhaps.
Who gains?
Industry, in particular owners of retail chains, will benefit with expectations of large investments from foreigners at a premium to current prices. Real-estate mall developers will be direct beneficiaries in a sticky market. For the rest, the benefits are less easy to visualise. For retail investors, in the event that FDI in multi-brand retail is allowed, the run-up to the decision is likely to be more profitable than the post-event entity that is formed. Transfer pricing issues will take a long time to sort out, and domestic minority shareholders will find it difficult to make money. As with all investments, hype often does not mirror reality.
Will consumers benefit from 100 per cent FDI in multi-brand retail? The author finds the benefits are not easily visualized
By Anand Tandon | Mar 10, 2012
If you don’t share the government’s enthusiasm for allowing dominant foreign ownership in Indian multi-brand retail, you must be a luddite – that’s what the media would have you believe. The spin doctors of the policy have simplified the issues to the level of “with me or against me” – and opposition to foreign ownership is being defined in terms of resistance to “reform”. But are the issues really as clear?
Waste reduction through improved supply chain
India’s supply chain is regarded as inefficient. This is particularly true for perishables. Improving this is one of the key benefits of foreign investment, we are told. However, a broad-brush assertion of this nature is only partially accurate. The supply chain of milk and milk products does not seem to suffer from this infirmity. Cereals, pulses, sugar, edible oil, spices too – which make up more than 24 per cent of monthly expenditure per person (NSSO study 2004) — are well handled. Fruits and vegetables seem to suffer the most, but make up less than 10 per cent of the consumption basket.
This graphic shows that per capita food loss in Europe and North America is between 280-300 kg/year. In South and Southeast Asia, this figure is 120-170 kg/year – about half! While it is true that a larger part of the waste in South Asia is in the “production to retailing” chain, it’s important to note that it is lower in absolute terms compared to the “more efficient” supply chains of Europe and North America. The loss in the “retail to consumer” segment is not even worth comparing. The assumption that foreigners do better at preventing wastage is not supported by facts.
Back-end investment is already allowed
Importantly 100 per cent FDI is already allowed in supply chain infrastructure. Actual investment has been insignificant. The DIPP (Department of Industrial Policy and Promotion) attributes this to absence of FDI in retailing. In other words, it is not worthwhile to invest in back-end infrastructure, even to service the “organised retail” outlets owned by Indian entrepreneurs – unless one owns the final retail outlet. How is this to be explained?
If the need for cold chain infrastructure is so compelling, returns on these investments should be attractive. Additionally, government incentives are available. There should be investors lining up to set up these. Discussions with large supply-chain managers – the likes of NBHC (National Bulk Handling Corporation) and NCMSL (National Collateral Management Services Ltd.) reveal that investment returns on supply chain infrastructure does not exceed single digits – unless one also factors in the appreciation in land value. Business returns are lower than domestic cost of capital, and returns are derived from speculative asset price changes. Perhaps, the issue is less to do with the availability of capital as with high land prices, and uneconomic land sizes which increase the cost of procurement and handling.
Better farmer prices – price discovery is more important
Another “benefit” that is ascribed to foreign ownership is better price realisation for farmers – at the expense of the intermediary. However, this is more a case of price discovery and its transmission.
Lately, price of processed pepper (garbled) has been lower than that of unprocessed pepper. First, this is unusual. But it does demonstrate that for commodities where there is an organised “price discovery” mechanism – through a functional exchange — the farmer is not being fleeced. In fact, today the farmer is well informed about prices across markets, and sells at a price that just leaves the intermediary with margins that equal cost of capital and transportation costs, leaving the aggregation risk to be managed by the intermediary.
Procurement issue is also about size
More losses occur due to farm holdings that are fragmented, leading to multiple handling and storage issues, than due to any “inefficiency” in the supply chain. To think that managers from ITC, Reliance and Tata’s, or for that matter, those from Olam, Cargill, or LD would not have sorted out supply chain issues if there was a way to do so, is to assume that Indian companies are poorly managed!
Yes, procurement is already 100 per cent FDI compliant – so if large efficiencies were to be gained by foreign capital, they already would have been. If despite being free to buy from India, large global retailers buy 20 times more from China, that tells you what is going to happen once they are allowed to sell in India – we will build a supply chain for Chinese products to be sold in India.
Lower consumer prices – but how?
With no likely improvement in procurement methodology, and with higher costs associated with supply chain (assuming that it is actually set up), how will the prices at the retail level fall? Perhaps by diverting more supplies to towns (cold storages will allow perishables to last longer) at the expense of rural India. But will higher cold chain storage and transport costs allow final prices for urban consumers to fall? And, importantly, what happens to the food supply to semi-urban and rural areas – they are left with less food diversity and poorer health perhaps.
Who gains?
Industry, in particular owners of retail chains, will benefit with expectations of large investments from foreigners at a premium to current prices. Real-estate mall developers will be direct beneficiaries in a sticky market. For the rest, the benefits are less easy to visualise. For retail investors, in the event that FDI in multi-brand retail is allowed, the run-up to the decision is likely to be more profitable than the post-event entity that is formed. Transfer pricing issues will take a long time to sort out, and domestic minority shareholders will find it difficult to make money. As with all investments, hype often does not mirror reality.
