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Home > Business > Special


FDI, not rising salaries, to fuel India retail boom

Raghav Gaiha & Ganesh Thapa | November 03, 2006

A recent report by ACNielsen (Shopper Trends, October 19, 2006) paints a rosy picture of an emerging retail boom in India, "with one modern store for every 400,000 population" at present.

Among the factors that are driving this boom are convenience of shopping, store accessibility, quality of products, loyalty programmes and product assortment. From a broader economic perspective, the diffusion of supermarkets can be conceptualised as a system of demand by consumers for supermarket services, and their supply in developing countries.

On the demand side, several factors have contributed to the expansion (alternatively, diffusion) of supermarkets during the past 5-10 years. These include urbanisation, and the entry of women into the workforce outside their homes.

Higher workforce participation of women is reflected in a higher opportunity cost of their time, and the incentive for them to buy processed food to save cooking time. This incentive is reinforced by lower processed food prices, offered by large food manufacturers, due to economies of scale in procurement.

Higher per capita incomes are another contributory factor. So as incomes rise, the convenience of shopping combined with a preference for variety, attractive packaging, and new flavours manifest themselves in stronger demand for supermarket services ("On Modelling Variety in Consumption Expenditure on Food in India" by Jha, R R Gaiha and A Sharma, 2006, Canberra: Australian National University, mimeo). A distinct but related factor is the size of the middle class.

Rapid growth of refrigeration during the 1990s made it easier to switch from daily to weekly or monthly shopping. Easier access to cars and other forms of transportation further facilitated this switch.

Supply of supermarket services was relatively slow in the 1990s, as it was driven largely by domestic capital. More recently, a shift occurred due to FDI. The latter in turn -- mostly from Europe, USA and Japan -- reflected intense competition in domestic markets and prospects of higher returns in developing countries.

There was a deluge of FDI following partial or full liberalisation of the retail sector in many developing countries (for example, partial liberalisation in China in 1992, with full liberalisation scheduled for 2004; Brazil, Mexico and Argentina in 1994; several African countries in the mid-1990s; Indonesia in 1998; and India in 2000).

Overall FDI grew 5-10 fold in these regions during the 1990s, and growth of FDI in food retailing mirrored this growth. Another concomitant factor was the revolutionary change in retail procurement logistics technology and inventory management (such as efficient consumer response, ECR). These changes were key to centralise procurement and consolidate distribution in order to "drive costs out of the system".

These efficiency gains lead to investments in new stores, and, in combination with competition, brought about reduction in food prices ("The Rapid Rise of Supermarkets in Developing Countries: Induced Organisational, Institutional and Technological Change in Agrifood Systems" by Reardon, T C P Timmer and J Berdegue, 2004, Electronic Journal of Agriculture and Development, Vol 1, No. 2).

The first wave of supermarket diffusion occurred in richer countries in Latin America; the second wave followed in east/south east Asia, and central Europe; the third in the smaller or poorer countries of Latin America and Asia, and southern, then eastern, Africa; and the fourth is beginning to hit south Asia and western Africa (Reardon et al. 2004, op.cit).

A recent study ("Supermarkets, Smallholders and Livelihoods Prospects in Selected Asian Countries" by Gaiha R and G Thapa, 2006, Rome: IFAD, mimeo), assesses the prospects of growth of supermarkets in selected Asian countries.

The main findings are: Supermarket shares in retail food sales vary with per capita income; the shares are also higher in countries where female participation rates are higher; the greater the affluence of middle and upper income classes to the poorest 20 per cent of the population, the higher is the supermarket penetration; urbanisation has a significant positive effect but only after a threshold (of 40 per cent of the population being urban ) is crossed; last but not the least,  there is a strong positive relationship between the openness index (that is, ease of entry of FDI) and supermarket share. This represents a supply side variable (that is, the ability of multinationals to invest large amounts).

Our projections for 2015 point to high rates of growth in supermarket shares in almost all Asian countries examined. An exception is Pakistan where the share will rise (relative to the baseline of 2002) but likely to remain low (4 per cent).

The most spectacular rise is likely to be in China, followed by Thailand and Indonesia. India is likely to triple its share (from 2 per cent) but it will still remain low (7 per cent). Bangladesh is, however, likely to record a much faster growth rate (it will rise from 2 per cent to 10 per cent).

A somewhat striking result is that while the growth of income will fuel supermarket expansion, relaxation of restrictions on FDI is likely to have a more significant role.

In conclusion, the prospects for supermarkets are bright in Asia -- including countries such as India starting with very low shares. Much, however, will depend on capital liberalisation and opening up of the food retail sector.

Raghav Gaiha is Professor of Public Policy, Faculty of Management Studies, University of Delhi; Ganesh Thapa is Regional Economist for Asia and the Pacific, International Fund for Agricultural Development, Rome. The views expressed are, however, personal.


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