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Why Kamal Nath cannot afford not to allow FDI in CONSUMER ELECTRONICS retail in India!

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Why Kamal Nath cannot afford not to allow FDI in CONSUMER ELECTRONICS retail in India!

Nitish Tipnis, Head-Operations CDIT Business, Reliance Retail* talks to R S Roy, Editorial Director,

The issue of Foreign Direct Investment (FDI) has been debated time and again as the Indian Government has been under pressure to open up further. The policy makers continue to explore areas where FDI can be invited without hurting the interest of local retail community. Addressing the high powered industry and media meet at the release of India Retail Report 2007 and launching of Mr. Kamal Nath, Commerce & Industry Minister Government of India, gave firm indication on opening up of certain retail sectors for foreign direct investment (FDI).

The four sectors are electronic goods, Office equipments & stationery, sports goods, and building equipment.

While most of the segments have been well researched in terms of size and scope with performance of key players and their expansion plans and the findings have been adequately presented in the India Retail Report 2007, the need was felt to delve deeper into the subject to understand the reasoning and implications of opening these sectors to global players.

From his series of meetings and discussions, R S Roy presents excerpts of his interview with Nitish Tipnis, Head-Operations CDIT Business, Reliance Retail* to gather his view on FDI in the Consumer Electronics Retail Sector in India and its potential benefits.

R S Roy: Why should we invite/not invite FDI in consumer electronics retail sector?

Nitish Tipnis: FDI in consumer electronics is welcome. There’s room for everyone. With penetration levels of electronics and appliances being very low(less than 30% in a category like refrigerators and televisions), FDI will allow healthy competition in the marketplace.

With more organized retailers joining in the ring, the market will see more vibrancy in this industry. With increasing ‘noise levels’, there will be an increase in awareness levels wrt products, technologies, usage patterns all leading to higher aspiration level amongst the consumer. This reaction will catalyze the sales patterns, leading to an explosion in penetration. The benefit of course would be felt by all retailers of substance. Additionally, this retail sector will provide job opportunities to at least two million young people who can be harnessed to take over positions of responsibilities over a period of time

If any player wishes to get into this business in an organized manner, he must have the appetite and resource base to invest into the country.

R S Roy: How do we define the consumer/personal electronics retail sector and each category in it?

Nitish Tipnis: The business can be broadly divided into Consumer electronics, appliances, IT products, Telecom, Gaming and services.

Consumer electronics covers the gamut of Audio,Video, Imaging/Photography, personal entertainment and car audio/video.

Appliances include home laundry products, hygiene products, cooking appliances, personal care, heating and air-conditioning.

IT products cover computing, personal communication, networking devices, PC/online gaming and packaged software.

Telecom encompasses Telephony(wired, wireless and mobile), Internet connectivity, pre-paid and post paid connectivity.

Services drives all the above by considering issues of installing products/services, upgrades, consumer finance and repairs/maintenance of equipment.

R S Roy: What are the retail margins in each category?

Nitish Tipnis: As anywhere in the world, retail margins stand around 25-30%. While these heads could vary from country to country, organized retail works on a transparent methodology of margin structures.

Even in the unorganized trade, these margins are passed on either by way of terms of business or thru’ adhoc price balancers. Unfortunatley, while manufacturers have been passing on these margins to smaller trade, commitments on volumes and price parities are minimal resulting in an overall drop in manufacturer earnings. With organized retail taking shape, the manufacturers will see an overall increase in volumes with better forecasting methods deployed by trade partners. The natural benefit to this will be achieving huge economies of scale. Manufacturers who understand this worldwide will get the first mover advantage in India as well and take the larger shares of shop shares and shelf space.

R S Roy: How much would be the store setting up cost for consumer/personal electronics stores?

Nitish Tipnis: Unlike in the west, India has not yet reached a level of maturity on quality of fit outs, methodology of store construction and designs.

In retail, lead times to turnaround barren stores to fitting out and opening is a frustrating experience. There is very little store property expertise to plan proper store layouts, construction and create world class store experiences. This is an area which needs to be considered as a support infrastructure need. FDI in infrastructure industry for ‘best in class’retail fitments is a must if organized retail needs to be incubated.

Due to these issues, store construction costs can take up large portions of monies as an initial set up cost which can be recovered only over a life of the store.

The other crucial cost in setting up electronics store is setting up of the IT backbone to ensure all devices and displays provide a compelling consumer experience for shoppers to get involved with purchase cycles.

Lack of road infrastructure, logistics and warehousing can further increase set up costs which needs huge investments for any sizeable player.

R S Roy: Will global consumer/personal electronics retailers invest in India opening stores?

Nitish Tipnis: Any retailer of substance in the world wants to grow. Due to low penetration levels, India provides this opportunity for growth. Every large retailer is looking at India. Drawing a parallel from the telecom revolution during the past 7 years, no large organization would miss this opportunity. The challenge for any foreign player is to understand the laws of the land, cultural aspects of India and operate in non-ideal infrastructure related environments. This is where Indian organizations have a cutting edge’over such players. Results of any large speciality retailer capturing dominant market shares in countries other than his originating one is yet to be proven. Players like Wal mart, Dick-Smith and Jumbo are already here. I’m sure the others are conducting their diligence.

R S Roy: Will it hurt local manufacturing of consumer/personal electronics?

Nitish Tipnis: On the contrary, it would kick start the next growth curve for local players. The electronics industry has nuances that do not allow direct imports of large appliance and electronic products which have large potential. This has been proven over the last 3 decades. With such products, the largest element of import is importing air/space’which is a useless commodity to import. The next is cost of manufacture in India vis-à-vis abroad. Indian companies like Videocon, multinational players like LG, Samsung and Nokia are setting up facilities to export produce to meet global demand. It is companies that invest in that will benefit. One has to sow the seeds in the local land to reap the benefits; whether in the primary sector or otherwise. Deemed manufacturers who merely brand market end products are the ones that will get marginalized with organized retailers who would rather private label such products than allow such brands increase cost structure. Cutting all such layers will lead to better street prices, economies of scale resulting in higher consumption for all stakeholders in India inc.

* All comments in the interview are personal opinions of Nitish Tipnis and do not express those of the organization that he works with.

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