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Wednesday, September 19, 2012

About FDI in Aviation and multi-brand retail – a guest post

When the UPA government first proposed introduction of FDI in multi-brand retail about a year back, the BJP opposed it vehemently and Mamata Banerjee’s TMC threatened to pull out of the UPA alliance. The government back-tracked and postponed the issue.

Now that FDI in Aviation and multi-brand retail have been re-introduced, the usual suspects are doing their song-and-dance routine once more. Will the government succumb again to their pressure tactics, or will they try to push through the much-needed reforms? Only time will tell.

In this month’s guest post, Nishit presents his point of view about how FDI in Aviation and multi-brand retail may benefit India and some Indian companies.

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TV channels and newspapers are abuzz with the policy decisions of the Government in the past week. Let us look at a couple of decisions. FDI in Aviation and FDI in Multi-brand retail.

FDI in Aviation means foreign companies/airlines can hold up to 49% stake in Indian airline companies. Indian aviation sector is bleeding and there are airlines like Kingfisher which are on the verge of closing down. The main reasons for this are high Aviation Turbine Fuel (ATF) charges and price under-cutting by competing airlines.

Why will a foreign airline be interested in an Indian carrier? India is one of the fastest growing aviation markets in the world. Airlines like Emirates have flights from major cities in India to Dubai. They have not been able to penetrate Tier-2 cities, which have a lot of potential for out-bound travel. Now, if they take a stake in a domestic carrier they will be able to attract the customers of the domestic carrier for their international routes. E.g., if Emirates have a flight from Chennai to Dubai, then passengers from nearby smaller cities like Madurai can fly to Chennai on a domestic carrier in which Emirates has a stake before boarding the international flight to Dubai. They can also bring international best practices to optimise domestic business.

The companies most likely to benefit from FDI in Aviation could be Jet Airways and SpiceJet. In the unlisted space, GoAir stands a pretty good chance as well. Indigo has the option of going public to raise funds. Kingfisher has too many problems for anyone to be seriously interested.

FDI in multi-brand retail is a contentious issue. Opponents argue that it will hurt the Indian farmer and local ‘kirana’ stores. Contrary to this, it will hurt the middle-man and the trader community who make fat profits by buying vegetables very cheap from the farmer and selling it at expensive rates to the consumers. Peas, which the farmer sells at Rs 8, retail at Rs 32. The price hike is due to the commissions of the middle-men.

There are several safeguards in place for allowing FDI in multi-brand retail. Such stores can only be opened in cities with population exceeding 10 lakhs. There are only 53 such cities (out of 8000) across the country. Other safeguards include investment in cold chain, countervailing duties against cheap imports. Also, it would be too expensive to import vegetables. The farmer may gain thanks to contract farming. Consumers will gain thanks to cheaper pricing. An example is that of packaged products. The local grocer sells a packet of Brooke Bond Red Label tea to me for Rs 330. The mall gives it to me for Rs 289.

Organised retail already exists in the country, and their market share is a meager 4%. It also generates employment for semi-educated youth. ‘Kirana’ stores are existing side-by-side with large malls. Large amounts of agricultural produce rots every year because of insufficient transportation and storage facilities. FDI in multi-brand retail is expected to improve back-end logistics and systems that will reduce wastage and loss to farmers. Ultimately, old and inefficient ways of doing business have to make way for more modern and efficient processes.

In retail stocks, one can look at Pantaloon, Shopper’s Stop and Trent. Pantaloon is the best positioned as it has structured its business in such a way that it can have multiple tie-ups.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan).

Related Post

Will FDI in retail be good or bad for India?http://investmentsfordummieslikeme.blogspot.in/2011/12/will-fdi-in-retail-be-good-or-bad-for.html

3 comments:

manya said...

sir, bharti walmart wholesale malls opened stores in maharashtr.In aurangabad first month cause of bharti walmart local business is down by 50%. ourselves running wholesale cosmetic store in sangli ( maharashtra). bharti walmart is opneing store here in oct. der wil b huge impact to our market distributors wholesalers wil b in trouble. n about margin manufacturin co.s doesnt gives us huge margin like dey give for walamrt.so in our case we r nt fooling consumers ,cos r fooling. so by these types of malls wer wil we go? consumer wil nt com to our shops as walmart wil sell cheaper dan us.dis wil hurt us vry badly

Nishit Vadhavkar said...

If they are giving discounts only to the wholesalers like Bharti Walmart, then sooner or later the margins will begin to impact.
The Bharti Walmart outlets are meant only for the Kirana stores to go and buy.
Ultimately, they will have to stop giving bigger margins to Walmart or else they will suffer.
If they hike prices, people will move to other brands.

manya said...

regarding brooke bond example malls get huge discounts from mfg. co.s n dats y dey sell cheaper dan others. mfg.co.s r fooling consumers. y dey dnt giv huge discounts 2 wholesalers so dey can pass it 2 retailers n dey wil also able 2 giv sum discounts to consumers