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Economy Sep 13, 2012

FDI in retail: Why online retail is the real threat

By Rajesh Pandathil

The threat now is attack via sea route, said Prime Minister Manmohan Singh to state police chiefs. That was an advice about terror threat, the country's vulnerability.

But it could be also be on retailing, which is facing a real threat of e-tailing, the attack via sea route.

And Mamata Bannerjee, habitually opposed to any type of reforms, may not have much to do about that.

It is a story of the predator turning the prey in the US. Wal-Mart, perceived a threat to the neighbourhood retail shops, is being threatened by giants in the e-commerce space, like Amazon.

And picking up the gauntlet, Wal-Mart has started offering better discounts, said a BusinessWeek report.

Reuters

"A study conducted by Kantar Retail, a London-based research firm, compared prices on a wide range of 36 items and found that on average they're 20 percent more expensive at Amazon than at Wal-Mart," the report said.

The world's largest retailer is yet to make its grand entry into multi-brand retailing in India, as the government dithers on retail reforms, fearing a political backlash. But whenever the sector opens up, it is clear the attack is going to be through online too.

"I'm building a global platform and global capabilities. We have some terrific platforms around the world that we have great leadership positions in," Wal-Mart Chief Technology Officer, Jeremy King says in an interview in Mint.

He promises the company is "going to do great things in the online space".

According to him, Wal-Mart can leverage its huge distribution capability and the technology expertise.

On the Amazon threat, he says Wal-Mart doesn't have a brand problem.

"We have very loyal customers that are also shopping online and picking things up at the store," he says.

As much as 50 percent of the orders are placed online and then picked up at the store, says he.

So, it is not killing the brick and mortar retailing in the US, and definitely not in India - not in the near future.

But the threat seems to be clear and present. Considering the realty and rental rates in India, no surprise if retail giants hitchhike an online strategy.

"Walmart's so-called Big Box or hypermarket model will fail in India," Swaminathan S. Anklesaria Aiyar said in an earlier blog on The Times of India website.

It requires acres of parking space, and so is typically located on the outskirts of a city or in small towns where land prices are low, he said.

Even poor Americans own cars and will drive 20 miles to a distant Wal-Mart. But Indian land prices are astronomical even in city outskirts, making low-cost hypermarkets impossible. Only a small minority of Indians has cars, and because of traffic jams they will not spend hours to drive 20 miles to the outskirts of towns for shopping, he said.

So, the threat of an online attack on retail in clear and present, at least in major cities. And the brunt is likely to be on the logistics and warehousing sector.

by Rajesh Pandathil

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