Opening up of organized retail sector in India will have major impact on Indian export. If you are an exporter - its time to take stock of emerging opportunity and prepare yourself accordingly.
Removal of multifibre agreement in 2005 has hugely impacted Indian textile sector. Absence of quota restriction has witnessed huge increase in export of Indian textile products. All doomsayers who predicted collapse of Indian textile export in the face of Chinese competition in a quota free world had to eat crow. Similarly - another opportunity for large sections of Indian export - handicraft, garments, home furnishing etc. is beginning to emerge now
How Big is the Opportunity ?
Global retailers buy about US Dollar 60 billion of goods each year from China alone. India has so far managed to export only about US Dollar 1 billion worth of goods to global retailers. Obviously, scope of exports through the global retail chain is enormous. But what's so special about 2006 ?
The reason for such high optimism lies in a recent Govt decision allowing global retailers to open shop in India. In a major decision, the Cabinet on January 24' 2006 decided to allow international brands to set up their retail chains with majority stake instead of having to depend on local franchisees.
So Marks & Spencer, Giordano, Nine West and Macy's can now have their own stores in India. The move will also help companies which already have a sizeable presence in India but have to operate through a network of franchisee stores at present - like Nokia and Adidas.
While detailed guidelines is yet to be issued, commerce and industry minister Mr. Kamal Nath has told reporters that companies can hold up to 51% stake in the retail chain ventures. The government has also decided not to cap the number of stores that can be opened.
This could be the first significant step towards entry of foreign retail chains like Wal-Mart, Target and Carrefour in the Indian market.
Why FDI in Retail will Help Indian Exporters
Major Retail Chains are already procuring from India. How does their direct presence going to affect Indian Exports in a significant way ? After all, Wal-Mart can buy from India without opening their store here.
Though theoretically, Wal-Mart or any other global retail chain can source from India without opening their shop here - in reality, they do not work that way. That is the reason why India's export to global retailers is so meager today.
A global chain would buy large quantities for exports on a sustained basis only when it establishes a close linkage with the local market and suppliers. This happens after they open local stores.
By being close to local suppliers and customers, the global chains remain in far better position to control and monitor the supply chain including product design, quality of inputs, manufacturing process, standardization, labeling and packaging, transportation, storage, warehousing, distribution network etc. Such closeness with supply chain enable them to change product mix quickly in response to changing global fashions and establishing the right kind of captive suppliers who would not be selling to their competitors.
Establishment of efficient supply chain and related infrastructure that global retailers develop for their local stores, would yield significant cost economies when the same infrastructure is used to procure supplies for their global needs. Resultant efficiency and economy of scale can not be expected from their existing lot of Indian suppliers.
Today, Wal-Mart sources some $18 billion of goods from China for their global operations. However, this happened only after Wal-Mart was allowed substantial presence in Chinese local retail market.
Indian manufacturers and exporters should lap up this emerging opportunity and prepare themselves accordingly. Understanding sourcing process of global retail chain is the first step in that direction.
Happy and Productive Surfing
Dr. Amit K Chatterjee
FAIDA - Newsletter on Business Opportunties from India and Abroad
Vol: 6, Issue 21
; February 10' 2006