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FDI in food retail: Ambiguity persists on category definition, merchandise mix

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Even as the government is yet to detail the fine print on its FY’17 Budget proposal to allow 100 per cent foreign direct investment (FDI) in processed food retailing (brick-and-mortar), reports now suggest that allowing FDI in online food retailing is also under consideration.

As per reports appearing in some sections of the media today, the government is keen on driving food consumption in India through all means available, as long as the food products are indigenously manufactured and sourced.

This, when a clear definition of food retail and its constituents is yet to be clearly laid out. This lack of clarity has been long plaguing the industry, with some experts even questioning the government’s intent to facilitate development and growth of India’s retail sector.

“It is really unfortunate that the entire retail policy in the country has been made around the term ‘multi-brand retail’. In fact, we are the only country in the world to use that term. I think the entire retail industry is trying to make sense of what it really means,” Future Group CEO Kishore Biyani had told Indiaretailing in an earlier interview.

What needs to be understood is what the government means by ‘food’ as a category. Food as a category earns one of the lowest margins for retailers worldwide. Most supermarket chains and grocery retailers offset this pressure with higher-margin FMCG and packaged foods to stay viable. Global retail majors such as Wal-Mart and Tesco get 55-60 per cent of their sales from food and staples, with general merchandise, personal and home products taking up a bulk of their profit pool with net margins as high as 10-15 per cent.

Will grocery and FMCG also be included in ‘food retailing’, the way the government sees it? Experts suggest that the draft policy could consider changing the definition of food product marketing to ‘grocery and personal care items retailing’, before being finalised.

As for the — reportedly under-consideration — FDI liberalisation for e-grocers, there is the added complication pertaining to their operating structures as well. Last week, the DIPP allowed 100 per cent FDI in e-commerce marketplace models only, leaving the inventory-led models — such as BigBasket — out.

Even if the government were to clearly define which products would and would not be part of food retailing merchandise mix shortly, the current policy suggests that the benefits would accrue only to hyperlocal/ marketplace operators, not the inventory-based platforms such as BigBasket.