Is
the future here?
Foreign direct investment
in retail and real estate businesses
will pave the way for a better quality of life.
New Delhi March 19,
2005
Sangeeta Singh
Bysiness Standard
Vivek and Aru Srivastava, residents of Celebrity
Homes in the NCRs Palam Vihar, cant understand
what the fuss in foreign direct investment in retail
and real estate is about.
Theyre happy about the ambience they live in
complete with club house, gym and swimming
pool and the malls are within close driving
distance. How will foreign companies improve the quality
of their life any further?
Its a question traders from Delhis Karol
Bagh to Mumbais Crawford Market, and property
dealers in Delhis Paharganj to Mumbais
Kandivli are also asking, not without some trepidation.
For large-scale realtors and retail investors could
upset their apple carts, which are often no more than
mom-and-pop, hole-in-the-wall outlets.
When the retail boom overtakes India, especially
in food, grocery and clothing, and residential and
commercial complexes evolve along modern, clean formats,
will it spell the end of the local kirana shop, the
helpful (but oily) neighbourhood property dealer?
Will India then take its place among the emerging
markets of Singapore, Malaysia, Thailand and China?
With foreign direct investment, the answer is probably
yes. To view the difference that FDI in retail
and real estate can make, evaluate the quality of
construction of houses, offices and malls in Singapore,
Malaysia and China, says Vivek Mehra, executive
director, PricewaterhouseCoopers (PwC).
Its a far cry from what passes for development
in Indian cities: illegal construction, encroachment,
poor approach roads, and filth.
Yet the government was mum over allowing FDI in real
estate and retail, two sectors that contribute to
the quality of life, that is until last month, when
it gave an in-principle clearance in the case of real
estate, and the ministry of commerce & industry
issued guidelines under the automatic route for FDI
in construction.
For the Indian consumer, the entry of foreign companies
into these sectors involves three pivotal changes
modern technology, transparency in dealings,
and the best practices.
Vivek Mehra suggests that even if one in a hundred
builders is a global player, high benchmarks will
be established among the Indian players, and these
changes could take place as early as within 12-18
months.
Arvind Singhal, chairman, KSA Technopak, takes a
similar view about retail.
The Srivastavas lucked in with their Celebrity Homes
at a time when real estate in India was booming. Or
take Ajay and Priya Jain, residents of Laburnum apartments
in Gurgaon where, like the Srivastavas, they take
their facilities and maintenance for granted.
But the Jains and the Srivastavas are among the lucky
few who got what they were promised by their builders,
without the cluster of shanties and piles of garbage
that surround most real estate ventures in Mumbai,
Delhi, Bangalore, Chennai and Kolkata.
However, with the government opening the real estate
sector to foreign developers, some, like Anuj and
Vanita Gupta have postponed their decision to buy
a home till the foreign players actually come to India.
We expect a quality house at a decent price
and want to see zero discrepancy between what is shown
as the built-up area by our builder and what we actually
get, says Vanita.
Does that suggest that domestic developers have fudged
their promises? Well, not everything is in our
hands, says the official spokesperson of DLF
Universal, Vijay Vancheswar.
Every builder pays the state government external
development charges, but this money is not being ploughed
back. The result is poor approach roads and garbage
and filth surrounding good buildings.
Foreign partners, on the other hand, will be able
to pressure government departments to beautify surroundings.
Streaks of this can be seen in Bangalore, Hyderabad
and Chennai, where foreign investment has set in,
says Anshuman Magazine, managing director of multinational
property consulting firm CB Richard Ellis.
Does the same optimism prevail in the retail sector
as well? Shikha Duggal, a Delhi-based entrepreneur
and a frequent traveller, laments the state of Indian
malls.
You have such a wide variety of products to
choose from at Walmart in the US. I feel Crossroads
and Shoppers Stop are nowhere close to them,
says Duggal.
She has the support of Gurgaons K Subramanian,
a gizmo freak. When I have to shop for jeans,
visiting a mall makes sense because I can try several
brands together, but what choice do I have when I
want a PDA,a mobile handset, or even books?
he asks.
Hold on, says KSA Technopaks Singhal,
who claims that data across countries shows that the
introduction of modern retail formats helps reduce
prices by at least 10 per cent, particularly for food
and groceries.
FDI in retail will ensure a wider assortment
of high quality products and services, but at lower
prices. Analysts also suggest these formats
will build efficient supply chains and eliminate intermediaries.
The classic example of this is onions, which
have a farmgate price of Rs 3/kg but are sold at Rs
10-12/kg in the market, says Asitava Sen, principal
consultant, PwC.
It can be a win-win situation for farmers as well.
With Pepsi and McDonalds backward integration,
we get the best quality tomotoes, potatoes, lettuce,
babycorn and gherkins in our kitchens today.
What more? Consumers can be assured products with
better shelf lives, weights and probably low or no
contamination. If we followed modern best practices,
India could have been saved the recent embarrassment
caused by the rejection of its chilli powder in the
UK, says Singhal.
However, changes cannot and will not
happen overnight. Foreign players have no magic
wand. They will simply create competition that will
force others to improve, as happened in the automotive
and telecom industries, says Magazine.
But he agrees that property prices will bottom-out.
Vancheswar also feels that prices will become competitive.
I only hope domestic players dont have
to take a major hit, he cautions.
In retail as well, B S Nagesh, managing director
and chief executive officer, Shoppers Stop,
doesnt foresee overnight changes certainly
not for the first 18-24 months of foreign players
entering here.
Prices of consumer electronics could beat inflation
and segments like garments may even experience prices
coming down.
Another area where consumers feel improvements will
occur is with regard to transparency in the real estate
business. With builders concerned only with profits,
they take the money first and dont bother about
infrastructure.
Mehra feels foreign companies will build first, demonstrate
that their property is worth buying, and probably
command a premium in the next project.
However, what happens to maintenance? Laburnum, for
instance, said goodbye to CB Richard Ellis, which
was maintaining it, and started its own welfare association.
The reason? It was proving expensive. If foreign
players maintain your property, they will charge for
their pound of flesh, says Srivastava. Agrees
Jain, There are no free lunches in this business,
but who minds if one is getting good service.
Do these developments suggest the displacement of
maintenance and security teams in construction, and
will the introduction of Walmart, Selfridges, Carrefour,
Tesco or Sainsburys in India mean the closing of mom-and-pop
shops? Not quite, if you were believe Nagesh.
Unless organised retail becomes 18-20 per cent
of the total market, nothing will happen to your neighbourhood
retail shop, especially when catchments are shrinking
and their home-delivery service is just a phonecall
away.
A survey by KSA Technopak in Chennai which
has 20 per cent organised retail suggests that
the entry of Food World and Subiksha did not lead
to the closure of any neighbourhood store.
Since their fixed cost is abysmally low, they
will have to lose 54 per cent of their business in
order to exit, says Sen.
But is a big international brand enough to cheer
Indian customers?
Not quite. Take Marks & Spencer. In England,
it is a practical departmental store for the middle-income
group. Here, I enter the store only when there is
a 50 per cent sale, says Binu Mehta, an NRI.
Sen of PwC says most multinationals who have entered
India through the franchisee or licensing arrangements
are forced to operate at sub-optimal level.
That explains the high cost, as they cannot source
out of India. But then, even Shoppers Stop is
perceived to be expensive? Analysts suggest that this
too is an example of sub-optimal scale.
Krish Iyer, director and CEO, Crossroads, argues
that scales will be created with the entry of foreign
players. Over 40 per cent of our agricultural
produce goes waste because of poor warehousing. I
believe the entry of foreign retailers will help grow
the scale substantially in the short term, encouraging
entrepreneurs to invest in cold chains and warehousing,
he says.
Another good thing is that these modern formats are
expected to create employment.
Sen says considerable surrogate employment will be
added in terms of cleaners for toilets, people for
packaging, security guards and so on, with quality
employment in terms of weekly offs, eight-hour shifts
and the like.
Ninety five per cent of Shoppers Stop
employees are first-timers, English-speaking and computer
literate, and one would expect the trend to grow,
says Sen.
Not just that, India could also act as the outsourcing
hub for IT expertise in retail. That probably explains
why Tesco, Debenhams and Dairy Farm are studying the
Indian market Tesco, in fact, has set up a
BPO operation in Bangalore, and Dairy Farm has tied-up
with RPGs Food World.
But will the foreign players come to India? The general
belief is that international retailers look at two
things relevant population and quality income.
On both counts India and China are the two most promising
economies in the world, and
Iyer of Crossroads says that with India still to
catch up with China in attracting foreign capital,
there is ample scope. Finally, therefore, customers
can rest easy as someone else tidies up for them,
instead of getting by on obsolete models of quality
living in the metros.