Govt Looks to Al­low FDI in On­line Food Re­tail Busi­ness

Move aimed at bring­ing it at par with brick & mor­tar stores, which were per­mit­ted full FDI through a bud­get pro­posal this year, for sell­ing do­mes­ti­cally sourced food items 50% 141% 1%

The Economic Times - - Companies -

Sa­gar Malviya & Ruchika Chi­tra­van­shi

Mum­bai | New Delhi: The gov­ern­ment is con­sid­er­ing al­low­ing for­eign di­rect in­vest­ment in on­line re­tail­ing of food prod­ucts to bring it at par with a bud­get pro­posal to per­mit full FDI in the sale of such items through brick-and­mor­tar stores pro­vided they are sourced and pro­cessed in In­dia.

“There should not be any dis­crim­i­na­tion on off­line and on­line. The idea is to drive food con­sump­tion sourced from In­dia and it can hap­pen through any medium. As ecom­merce is the fu­ture of re­tail, any pol­icy that is framed on in­ter­nal trade should not ex­clude the new grow­ing av­enues to serve the cus­tomer,” two peo­ple aware of the devel­op­ment said. At a re­cent meet­ing be­tween in­dus­try of­fi­cials and se­nior gov­ern­ment of­fi­cials, it was also dis­cussed if the def­i­ni­tion of food should be ex­panded to in­clude gro­cery.

“No fi­nal view has been taken on this mat­ter,” said a se­nior of­fi­cial of the Depart­ment of In­dus­trial Pol­icy & Pro­mo­tion, ask­ing not to be iden­ti­fied.

The ob­jec­tive of the bud­get pro­posal for for­eign in­vest­ment in food re­tail was pri­mar­ily to ben­e­fit the food pro­cess­ing in­dus­try and farm­ers. How­ever, food earns one of the lowest mar­gins for re­tail­ers, an is­sue that has been plagu­ing the in­dus­try.

“The draft pol­icy could also look at chang­ing the def­i­ni­tion of food prod­uct mar­ket­ing to gro­cery and per­sonal care items re­tail­ing while draft­ing the pol­icy,” the of­fi­cial added.

Food and gro­cery ac­counted for al­most 50% of the over­all re­tail bas­ket, al­though on­line pen­e­tra­tion is still less than 1%, sug­gest­ing the in­fancy of the cat­e­gory and its po­ten­tial op­por­tu­nity. Mor­gan Stan­ley ex­pects the food and gro­cery seg­ment to be­come the fastest-grow­ing cat­e­gory, ex- Share of food and gro­cery of the over­all re­tail bas­ket Ex­pected com­pounded an­nual growth rate of food and gro­cery seg­ment by 2020, which will con­trib­ute $15 bil­lion, or 12.5%, of over­all re­tail sales pand­ing at a com­pounded an­nual rate of 141% by 2020 and con­tribut­ing $15 bil­lion, or 12.5%, of over­all re­tail sales.

Glob­ally, re­tail giants such as Wal-Mart and Tesco get 55-60% of their sales from food and sta­ples. How­ever, general mer­chan­dise, per­sonal and home prod­ucts fill up a bulk of their profit pool with net mar­gins as high as 10-15% com­pared with food, which fetches 3-5%. In­dia isn’t dif­fer­ent – the coun­try’s largest re­tailer Fu­ture Re­tail had an op­er­at­ing mar­gin of 12% due to big­ger con­tri­bu­tion of food al­though it is try­ing to change that by launch­ing sev­eral of its own brands.

Within on­line, fresh pro­duce ac­counts for al­most 20% for BigBas­ket and as much as 30% for Gro­fers, while pack­aged food prod­ucts con­trib­ute an­other 3540% of to­tal sales. “While sell­ing food prod­ucts would help farm­ers and small busi­ness, re­tail­ers will have to look at other gro­ceries and house­hold prod­ucts to earn profit and re­main sus­tain­able,” said one of­fi­cial.

How­ever, last week, the DIPP sa- Share of on­line pen­e­tra­tion id 100% FDI is al­lowed only in ecom­merce mar­ket­places and not in­ven­tory-based mod­els. The new pol­icy could now pave the way for ecom­merce gro­cers, es­pe­cially those that have in­ven­tory-based mod­els such as BigBas­ket, the coun­try’s largest on­line gro­cer.

“Our busi­ness re­mains FDI­com­pli­ant. The no­ti­fi­ca­tion is very pro­gres­sive and en­sures a level play­ing field and the in­ten­tion is to le­git­imise on­line busi­ness. While we don’t see any con­cern, we are await­ing for more clarifications,” said Vipul Parekh, co­founder of BigBas­ket, which has so far raised $220 mil­lion mainly from for­eign in­vestors.

BigBas­ket aims to in­crease gross mar­gins to 25-26% from 19% at present by part­ner­ing with farm­ers and set­ting up ded­i­cated ware­hous­ing units.

The on­line gro­cery space in In­dia, which has seen a mi­nor shake­out over the past year, has at­tracted more play­ers as well. While Lo­calBanya has tem­po­rar­ily sus­pended op­er­a­tions, off­line play­ers such as Re­liance Fresh and Go­drej Na­ture’s Bas­ket have launched omni-chan­nel ini­tia­tives, though the scale may not be large at present. Among general mer­chan­dise play­ers, Ama­zon In­dia launched its plat­form Ki­rana Now, Paytm launched Zip in Ben­galuru and Snapdeal tied up with Na­ture’s Bas­ket.

At a re­cent meet­ing be­tween in­dus­try of­fi­cials and the govt, it was also dis­cussed if def­i­ni­tion of food should be ex­panded to in­clude gro­cery

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