Large retail chains when they venture abroad do so in three phases. In Phase One, they often set up a test case/pilot project. This can be done through a partnership with local chains (with risk and revenue sharing), or a few flagship stores that serve as brand broadcasters. The chains employ this initial-phase entry strategy to learn lessons about the local markets. They assess demand, test merchandizing strategies and set up operational capabilities. In this phase, they bring in some investment to cover their set-up costs and for establishing their sourcing (supply) footprint. This usually takes 18-to-24 months.
In the second phase, firms expand their demand footprint; they open more stores and increase both the scale of operations (volume of products sourced) and scope of products that they feature. There is considerable investment in this phase in the form of real estate acquisition, putting in operational infrastructure, establishing sourcing relationships, establishing supply chains and massive logistics capabilities. This is volume-independent investment -- that is, investment meant to gear up for volumes of business to come, but not calibrated to the current volume of business.
In the third phase, the investment keeps pace with the rate of expansion. As volumes grow and urban and semi-urban retail locations get saturated, companies look for new locations and bring in investment that is calibrated to growth in volumes. It is in the second phase and the third phase -- which come after the initial 18-to-24 months -- that large investments manifest themselves.
The arrival of foreign retail chains has twofold impact. First, those companies set up supply chains and logistical capabilities, spurring significant improvements in the infrastructure needed to source, ship, store and deliver products (covering all aspects of value chain and supply chain activities, including storage, warehousing, and information-intensive operations). Second, their entry and expansion induce domestic competitors to invest in infrastructure and logistics, as well as greatly speed up the emergence of product standards (especially in perishables and personal consumables), and begin the process of bypassing monopsony buyers and traders that dominate procurement in many product categories today.
For these reasons, foreign investment in retail has an impact that goes beyond its direct investment impact. It is a force multiplier that induces even more investment from competitors.
Impact on Mom-and-Pop Retailers
FDI is often opposed on the grounds that it will put mom-and-pop stores out of business. This is very unlikely for several reasons.
The big-box retailers, when they venture into developing markets, do not use the same business model as they do in the U.S. Walmart -- the most iconic of these companies and the one most often cited as a threat to Indian mom-and-pop stores -- is by no means the lowest-price retailer in China. Walmart U.S. is based on "everyday low prices." The firm has an activity system that is meant to help Walmart compete as a cost leader. The company began by locating in rural areas and then moved to suburban and semi-urban areas in the U.S. In China, the rural areas and semi-urban areas are not where the money is. Consumers in China -- unlike their American counterparts living in suburbia - do not drive miles and do bulk purchasing, nor do they have massive storage facilities at home. In India, China, Brazil,...