Indian retail is booming, with its organised sector estimated to reach new heights in coming years. What does this strong growth, coupled with FDI in multi-brand retail, mean for one of the biggest bottlenecks in the supply chain? Shilpa Eguvanti analyses the reality behind the retail investment-cold chain correlation.
In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produce does not reach the end-consumer, and FDI in retail would contain inflation by reducing wastage of farm output. – Mike Duke, CEO, Walmart
In the recent past, foreign direct investment (FDI) in retail has been a hot topic in the Indian political corridors, as major international retail brands looked at India as their next strategic investment.
According to Deloitte, IBEF and other consulting firms, the organised retail sector is expected to contribute to ~20 per cent of the total retail by 2020, with groceries and food services contributing significantly to its growth. This growth will lead to increase in demand for efficient storage and supply chain facilities including cold chain logistics, especially for perishable commodities.
India is one of the fastest growing retail markets in the world, but looking at the lack of investments and the entire fiasco around FDI in retail, the estimation sounds very optimistic. The current cold chain industry is estimated at around Rs 24,500 crore and is expected to grow at a CAGR of 20 per cent to reach Rs 52,000 crore by FY 2017-still under the average requirement. If FDI in multi-brand retail is implemented as estimated, cold chain logistics may witness much higher growth and meet the demand-supply gap.
Hype or reality?
Retail sub-segments have different dynamics, especially for food and grocery and food services, the fastest growing organised retail sub-segment. FDI in retail has the potential to trigger tremendous growth here. But the huge resistance we have witnessed from traditional retailers and the opposition parties raises questions as to whether foreign capital flows in the Indian retail market will be conducive for the development of cold chain logistics.
FDI in retail can have many implications on cold chain logistics as summarised below:
Reduce wastage: India is the second largest producer of fruits and vegetables (about 200 million tonne [mt]), but has been struggling with a 40 per cent loss of produce annually. Under-developed integrated cold-chain infrastructure is the major contributor to this loss. Currently, India only has ~5,400 stand-alone cold storages with a total capacity of ~23.6 mt, which is barely 8-10 per cent of the total of US cold storage capacity-one of the largest cold storage industries in the world. On the other hand, India only has a capacity of ~4 mt in refrigerated transport, creating a huge demand-supply gap in agricultural segment. The loss is both post-harvest and in the processed food segment. In certain situations, even processed food that requires refrigerated transport is transported via non-reefer mode, especially to retailers at shorter distances from distribution hubs, resulting in a drop in product shelf life. Many retailers have stopped stocking certain brands due to this; as the product loses shelf life, it is non-saleable, leading to revenue loss to retailers, distributors and manufacturers alike.
Investment in back-end infra: Reforms announced by the Indian government ensure that at least 50 per cent of the total FDI brought in shall be invested in 'back-end infrastructure'. Back-end here includes processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure etc.
Everyone is watching keenly on how the Tesco and Tata joint venture (JV) will pan out. In fact it is fast becoming a case study on how FDI in India retail will work. Provided the JV is operational, Tesco will invest in the necessary back-end infrastructure in Maharashtra and Karnataka that Tata had not developed. Improvement in rural-urban linkages: Indian agriculture product distribution is plagued by intermediaries who hold monopolies at distribution zones. These intermediaries are small scale, and operate in unorganised sectors. Due to inefficient marketing systems, these intermediaries' tax farmers by placing low farm gate prices and further tax consumers by raising retail prices. Hopefully this reform could be the solution to link farmers directly with consumers, improve rural-urban linkages, agro-processing and thus check post-harvest losses.
Reforms in FDI in retail and clearances for roadways projects will also improve the rural-urban linkages and in turn contribute to the growth of integrated cold chain logistics in India.
Upgraded surface storage & refrigerated transport: The Indian government initially allowed 100 per cent FDI in cold chain, but it didn't receive the anticipated response. But if multi-brand retail becomes a reality in India it will create opportunities for warehousing, especially cold storage facilities, due to a mandate of 50 per cent investment in backend infrastructure which includes cold chain logistics which in turn consists of cold storage and refrigerated transport.
With the food security bill also seeing the light of day, it could bring about adoption of advanced technology and improve the quality of cold storages and refrigerated transport to reduce post-harvest losses and food wastage, which is the need of the hour.
In order to ensure that back-end infrastructure is developed, the government of India has added a clause that states foreign retailers investing in back-end supply chain and infrastructure will be allowed to set up multi brand retail. This policy will encourage investments in refrigerated transport (which is less developed in comparison to cold storage in India).
Will FDI in retail create an opportunity for international players to enter the Indian cold chain market?
Although the central government is pushing FDI in multi-brand retail with a clause that state governments have the authority to clear proposals for their respective states, the question still remains, will FDI in retail happen in reality?
This is a major impediment to potential investment from foreign retailers, and with political winds changing, foreign retailers will have to wait and see if there is an opportunity in the Indian retail segment. Apart from political uncertainty, foreign retailers will also have to address the problem of infrastructure bottlenecks and a business-unfriendly regulatory environment.
FDI in multi-brand retail is both an opportunity and a challenge, but is it the solution for developing cold chain logistics in India: that is something we need to wait and watch for.
The government of India established The National Centre for Cold Chain Development (NCCD) in 2011 to encourage and promote the development of cold chains, and assigned infrastructure status to facilitate modernisation of cold chain logistics and attract foreign investment in India.
The central government has assigned an additional budget to construct new and advanced cold storages facilities and has further cited FDI in multi-brand retail as the answer to improve cold chain logistics in India.
Implications of FDI in retail
Elimination of intermediaries: With penetration of organised retail, the role of intermediaries can be reduced and this in turn enables better realisation of farm gate prices among farmers. Further deregulation of the agricultural market by elimination of intermediaries and restrictions on storage can turn beneficial to farmers and consumers and further improve private investment in agribusiness infrastructure and adoption of new technology.
This can further ensure mutually beneficial relations between farmers and retailers. Farmers will have direct access to organised retail chains and with improved refrigerated transport; retailers can pick up fresh produce from cool rooms near the farms. This could save on storage and transport costs incurred when produce is procured from local 'mandis' and further eliminate post-harvest losses.
Accelerate investment in supply chain: India has been plagued with inefficient distribution for decades and increased scale of investments in the supply chain will not only help distribution, but will also increase productivity. This sector can witness adoption of advanced technology in packaging and storing, leading to high supply chain costs incurred. This could further provide consumers with a wider choice in produce at rationalised prices.
The author is a team leader and has managed projects in various infrastructure sectors at ValueNotes, which provides research-based business intelligence.