(Source: Business Standard | May 7, 2015)
In the last few days, the retail sector has seen serious consolidation. First, the Aditya Birla group merged its retail businesses into one, and then Future Retail announced that it will acquire Bharti Retail in an all-stock deal. This is a clear signal that the sector is under stress. Indeed three factors have taken their toll on organised retail: their need for capitalisation; high real estate prices; and the emergence of e-retail. Various studies show that although e-retail is still a small part of the market, it is growing at breakneck speed. Aided by the growing internet usage on mobile phones and Indian innovations like cash payments on delivery and free returns, its popularity has taken conventional retail by surprise. Such innovations may not be sustainable financially — but as long as they are being backed heavily by optimistic private equity funds, e-retailers are willing to pour money into them, as well as into more traditional strategic pricing and deep discounts in order to gain customers. As a result, many customers go to retail stores to sample products, but choose to place the order online. The category, which started with books a few years ago, has expanded to products like mobile phones, laptops, garments, accessories, furniture and even groceries. Some retailers have complained to producers about the strategic pricing done by e-retailers and some producers have threatened to block out e-retailers if their discounts undercut retailers, but that has not turned back the tide.
Then there is the question of rentals. Leases for brick and mortar stores are very high in many cities, totally out of sync with Indians’ low purchasing power. As retailers bleed, many malls, in recent quarters, have seen a huge turnover among stores. Some developers have converted malls into offices. Some have even been shut down. Quite a few developers have shelved or downsized their mall plans.
If retailers have to take on these challenges, they need to be adequately capitalised. But most of them are starved of capital. Under the current circumstances, given the uncertainty over the business, most retailers will find it difficult to raise money from the market, either from private investors or the public. Too much debt can choke their cash flows. It is, therefore, time to look at opening up the sector fully for foreign investment. Under the current rules, while 100 per cent foreign ownership is allowed in cash-and-carry trade, or wholesale trade, as well as single-brand retail, there is a cap of 51 per cent in multi-brand retail. Also, it has been left for each state to decide whether it wants foreign ownership of multi-brand retail stores or not. Most states have preferred to encourage foreign-owned wholesale trade, because it captures the supply-chain efficiencies, and close the gates for multi-brand retail, which will keep small retailers happy. Such a restrictive regime has outlived its utility. The time has come for the government to shed its ideological baggage and review the rules on foreign investment in this sector.