Report on Impact of FDI in Retail in India

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This report talks about the impact of FDI in Retail in India along with critically analyzing the versatility of the regulations which have been recently introduced for Multi Brand Retail

This report talks about the impact of FDI in Retail in India along with critically analyzing the versatility of the regulations which have been recently introduced for Multi Brand Retail

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  • 1. 12/2/2013 FOREIGN PARTICIPATION IN INDIAN RETAILSCAPE.. REVOLUTION OR EVOLUTION ANALYSIS FROM A TECHNOCRATIC PERSPECTIVE Akshay Seth
  • 2. Table of Contents Sno. Description Chapter 1 – About the Report 1. 1.1. 4 Abstract 1.2. Pages Methodology Chapter 2 – Indian Retail Sector 2. 2.1. Introduction 2.2. Sector Overview 2.3. 5 – 16 Growth and Evolution of Indian Retail Sector Chapter 3 – FDI policy in Retail 3. 3.1. Understanding the term FDI 3.2. Evolution of FDI policy in Retail 3.3. Structure of FDI policy in Retail 3.4. FDI in Single Brand Retail Trade (SBRT) 3.5. FDI in Multi Brand Retail Trade (MBRT) 3.6. FDI Policy in E – commerce 3.7. 17 – 24 Acceptance of FDI Policy by Indian States Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other Countries 4. 4.1. China 4.2. Thailand 4.3. Indonesia 4.4. Brazil 4.5. Russia 4.6. 24 – 27 Mexico Chapter 5 – Impact of FDI in Retail in China 5. 5.1. Impact on Farmers 5.2. Impact on Organized Retail 5.3. Impact on Traditional Retail 5.4. Impact on Supply Chain 5.5. 27 – 30 Impact on Consumers Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 2 of 56
  • 3. Chapter 6 – Critical Analysis of Impact of FDI in Retail in India 6. 6.1. Impact on Farmers 6.2. Impact on Traditional Markets 6.3. Impact on Consumers 6.4. Impact on Supply Chain 6.5. Impact on Employment 6.6. Impact on Inflation 6.7. 31 – 41 Impact on Government Revenue from Taxes Chapter 7 – SME Sector‘s viewpoint on Impact of FDI policy in Retail 7. 7.1. Impact on Sales 7.2. Impact on Size of Industry, Business / Capacity addition 7.3. Impact on New Orders / Contracts 7.4. Impact on Qualitative improvements & Branding of products 7.5. Impact on Supply Chain efficiencies 7.6. 41 – 45 Impact on Employment Chapter 8 – Analysis of current entry structure in line with FDI Policy regulations 8. 8.1. Entry structure for Foreign Retailers 8.2. FDI policy regulations for Single Brand Retail Trade (SBRT) – an analysis 8.3. FDI policy regulations for Multi Brand Retail Trade (MBRT) – an analysis 8.4. Impact of regulation: Minimum investment of USD 100 Mn 8.5. Impact of regulation: 50% of FDI to be invested in backend infrastructure in 3 years 8.6. Impact of regulation: 30% sourcing from small industries 8.7. Impact of regulation: Only cities with population more than 1 Million 8.8. Impact of regulation: Approval from State Government required 8.9. 45 – 52 Impact of regulation: E – Commerce not permissible 9. Chapter 9 – Key Challenges 10. Chapter 10 – SWOT Analysis 11. Chapter 11 – Conclusion 55 – 56 12. Chapter 12 – References 56 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective 52 – 53 54 Page 3 of 56
  • 4. 1. Chapter 1 – About the Report 1.1. Abstract India is one of the top five Retail markets in the world in terms of economic value, and the fastest growing market in the world with a catchment of over 1.2 billion people. Retail sector in India is considered to be the sunrise sector with a huge growth potential. Estimated to be between USD 450 – 550 Billion in 2012, the Retail Sector is expected to grow to USD 750 – 850 Billion by 2015. In its present state, the Retail sector accounts for nearly 14 – 15% of the country‘s GDP. However, in spite of its immense contribution to the economy, retailing continues to be the least evolved industries and the growth of organized retailing in India has been much slower as compared to rest of the world. This situation of the retail sector, despite the on – going wave of continuous liberalization and globalization can be blamed on weak policy framework and the absence of an encouraging and well structured FDI policy in the sector. In the above context, this research paper attempts to analyze the strategic impact of the influx of the Foreign Direct Investment (FDI) Policy introduced in its most current format in September 2012, for the Indian retail industry. This paper broadly covers the principal policy decisions of the FDI policy in Retail, and analyses the effects of these decisions on the retail sector. This paper also attempts to broadly study the impact of the FDI policy on major stakeholders, covering impact on farmers, traditional retail, consumers, supply chain, employment, inflation, and Government revenue in form of taxes. This paper attempts to draw out the benefits of allowing FDI in retail, and broad recommendations most suited to our country‘s diverse and dispersed retail market. 1.2. Methodology Reliance has been placed on the information contained in journals, reports, newspapers, research papers, online databases, etc. No information has been collected directly from primary sources. The research paper is based on secondary data / resources available for review. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 4 of 56
  • 5. 2. Chapter 2 – Indian Retail Sector 2.1. Introduction Indian retail industry is one of major pillars of the Indian Economy contributing nearly 14% – 15% to the country‘s GDP. However, as of date, the Indian Retail scenario has been dominated by owner manned small shops, mom & pop stores, small ―kirana‖ grocery / daily needs stores, etc. In 2010, larger format convenience stores and supermarkets accounted for about 4% of the industry, and these were present only in large urban centers. The sector in its present form is highly unorganized, with organized retail accounting for a meager 8% of the total sector. Until 2012, the Indian Central Government denied Foreign Direct Investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or other retail outlets. Even single – brand retail was limited to 51% ownership and a bureaucratic process. In September 2012, the Government of India passed a Foreign Direct Investment policy which now allows foreign retailers to own up to 51% in multi – brand retail and 100% in single – brand retail. With the introduction of the FDI policy, the organized retail sector in India, is estimated to grow at a staggering growth rate of 30% by 2015, which is twice as fast as the forecasted growth rate of the overall retail sector, which is expected to grow at a rate of 16%. It is hence anticipated, that these stores will now have full access to over 200 million urban consumers in India, approximately 47% of which are below the age of 30 and have high levels of consumption. 2.2. Sector Overview According to the India Retail Report 2013, the Indian Retail market is estimated to exceed US$ 750 billion by 2015, presenting a strong potential for foreign retailers planning to enter India. In its present state the sector stays predominantly unorganized, with organized retail counting for only 7% to 8% of the overall retail market as compared to over 20% in China, and over 85% in developed countries like the United States of America. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 5 of 56
  • 6. It can be perceived that the Indian retail market is in its nascent stage, dominated Fig: Retail Penetration across major markets(2012) by Organized Unorganized unorganized players that controlled the market with 95% market share during 2009 – 10, 15% however the organized retailers gained market share to 7% to 8% by 2011 – 12. There are over 15 million ‗mom and pop‘ stores in India which contribute to the large unorganized 92% 70% 80% 60% 45% 85% 30% 8% 20% India China 40% Indonesia Thailand 55% Malaysia USA market, whereas organized retail has been limited to Urban Centre‘s. Source: IBEF 2013 Organized retail in India is expected to cross 10% levels (of total retail market) by 2015 and 20% by 2020. According to A T Kearney‘s Global Retail Development Index (GRDI) 2012, India was positioned the 5th most favorable destination for international retailers. India also occupied a remarkable position in global retail rankings, and the country is considered to have a high market potential, low economic risk, and a moderate political risk. India also ranked 6th in the Global Apparel Index 2011. In terms of market potential, India ranked second after Brazil. Net retail sales in India were also quite significant among emerging and developed nations, the country is ranked 3rd after China and Brazil. Food and Grocery account for a major portion of the Indian Fig: Indian Retail Pie Retail Market contributing nearly 60% of the total revenues in the sector. This translates to nearly 48% of the total household income being spent on food and groceries. Apparel ranks second in the overall retail market, however is the largest segment under the organized retail sector. This can be attributed to the increasing demand for western outfits and garments that has been growing at 40% – 45% annually. Source: Deloitte 2013 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 6 of 56
  • 7. Fig: Organized Retail Setup Source: Deloitte 2013 Online commerce is expected to be next major area for retail growth in India. India‘s e – trailer segment is expected to grow to a size of USD 1.5 billion by 2015. The key drivers for growing importance of online retail are a young population aided by easier access to credit and payment options, increasing internet penetration and speed, 24 hour accessibility, convenient and secured transactions. Computer peripherals, camera and mobiles, and lifestyle segments account for a majority of total purchases in Online commerce. Table: Indian Retail Structure at a glance Type Characteristics Benefit to Consumers Mono / Exclusive branded retail shops Exclusive showrooms either owned or franchised by a manufacturer Complete range available for a given brand, certified product quality Multi Branded retail shops Focus on particular product categories and carry most of the available brands Customers have more choices as many brands are on display Convergence retail outlets Display most of convergence as well as consumer / electronic products, including communication and IT Group It is an online shopping facility or buying and selling products and services, the facility is widely used for electronics, health and wellness One–stop shop for customers, many product lines of different brands on display Highly convenient as it provides 24x7 access, saves time, and ensures secure transaction e-retailers Source: IBEF 2013 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 7 of 56
  • 8. The Indian Retail Industry has experienced a Fig: Growth of Indian Retail Sector growth of 10.6% CAGR between 2010 and 2012 and is expected to further grow at an estimated CAGR of more than 18% between 2012 and 2015. Source: Deloitte 2013 Within the retail sector, India has witnessed sustained growth in merchandise retail in the last decade 2002 – 2012. Even despite the economic uncertainty and the slowdown in India‘s economy, the growth of merchandise retail is expected to continue to grow sustainably. Table: Retail Market snapshot GDP (USD Bn) Estimated merchandize consumption (Retail Market opportunity) (USD Bn) Urban Consumption (% and absolute numbers) Rural Consumption (% and absolute numbers) Size of Corporatized Retail (%) Size of Corporatized Retail (USD Bn) 2001 450 120 2012 1958 490 2021 3310 810 40% (USD 48Bn) 60% (USD 48Bn) 4% 5 48% (USD 235 Bn) 52% (USD 48Bn) 7% 34 56% (USD 455 Bn) 44% (USD 48Bn) 20% 162 Source: Technopak 2012 The main reason for this growth can be attributed towards India‘s GDP growth, which is expected to grow at a sustained rate of nearly 6% in the next decade. This growth in GDP will get translated to growing consumption in Indian households, which in turn will be manifested as growth of merchandise retail through an increasing need for food, apparel and other sources of discretionary spending. India‘s share in merchandise retail is expected to grow from 48% in 2012 to nearly 56% by 2021. Ten years ago, this contribution was approx 40%. As expected in future, an increasing share of incremental merchandise retail will come from urban and semi – urban centers. This inference can be drawn as an outcome of the rapid urbanization that India has witnessed in the past two decades of sustained growth. Since 1991, India has witnessed the emergence of urban centers with a massive scale of consumption. In 2012, there were 53 Indian cities with populations in Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 8 of 56
  • 9. excess of 1 million as compared to 23 such cities in 1991, and only 5 such cities in 1951. Apart from these urban consumption centers (Metros, Tier I, and Tier II cities), urbanization of India will also include towns and clusters where the majority (more than 50%) of households will no longer be dependent on agriculture. The most crucial inference is the fact that corporatized retail‘s share of total merchandise retail will grow from the current 8% to 20% by 2021. The retail sector started to see private investments from both Indian and International players in the past fifteen years. In spite of these spirited efforts, Indian corporatized retailers have managed to garner a mere 7% to 8% of the Indian retail pie. Thus, 92% of the retail sector still comprises independent retail and is highly fragmented. This is despite the fact that India‘s GDP grew at more than 7% in the past decade. Table: Historical & Projected Growth Scenario’s for Indian Retail Sector 2001 – 2007 2007 – 2012 India‘s real GDP CAGR 8.5% 7% Corporatized Retail CAGR 17% 20% Share of Corporatized Retail at the end of the period 4% 7% Historical Growth Growth Forecast 6% Real Growth 7% Real Growth 8% Real Growth GDP (USD Bn) 3308 3600 3914 Overall Retail Market (USD Bn) 810 980 1065 Organized Retail Market (USD Bn) 162 246 350 Organized Retail as % of overall Retail 19% 25% 33% Source: Technopak 2012 In a recent report by Technopak advisors – a leading research and advisory firm, it has been estimated that the share of corporatized retail, in a realistic scenario, will grow to no more than 20% of the total merchandise retail pie by 2021. This will be due to the pressures of inflation and uncertainty in the world economy, making a sustained real growth exceeding 6% over 10 years as a challenging objective. Other reasons for this estimate have largely to do with the structural issues that adversely affect the value chain of the retail sector. This also encompasses issues of real estate, sourcing and distribution. It is thus opinioned that corporatized retail will not have enough leg – room to grow beyond the stated estimate. The complexity of these issues is such that, in Technopak‘s view, ten years will not be a sufficient time horizon for corporatized retail to overcome these hurdles and grow beyond the stated expectation. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 9 of 56
  • 10. It will however be dependent on the actions taken by respective Governments to reform their views on this aspect of growth, and make necessary provisions accordingly. 2.3. Growth & Evolution of Retail Sector The retail sector in India has undergone many stages of maturation to reach its present stage. However, it is still believed to be in a nascent stage, with organized retail accounting for only 7% – 8% of the total sector. Below figures show the graduation of Indian retail sector over a period of time from Initiation, Conceptualization, Expansion and Consolidation stage. Fig: Stage and Type of Indian Retail Source: resurgentindia 2011 Two most significant and learning phases of the Indian Retail Sector have been the ‗Hyper Growth Phase‘ between 2005 t0 2007 and the ‗Consolidation Phase‘ between 2007 to 2009. It is during these two action packet phases that the Retail sector has matured by committing several mistakes. During the ‗Hyper Growth Phase‘ in pursuit to capture market, many companies made strategic as well as operational errors which were as follows: Race for increasing retail space resulting in haphazard growth Unviable formats High lease rentals Man power costs and productivity issues Poor back end infrastructure Entry of too many new players Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 10 of 56
  • 11. Then during the global slowdown 2007 – 2009, the Indian retail players paused to realize their past mistakes and took time and effort to re – organize themselves by Focusing on profitable growth Exiting from unprofitable stores / formats Rental renegotiation / revenue sharing arrangements Reduction in salaries / higher man power productivity Significant investments in backend Exit of unsuccessful new entrants Fig: Growth Cycle of Indian Retail Sector Source: IBEF 2013 During the past decade of the evolution of the Indian Retail Sector, the organized retail segment has tried to increase its offerings and make itself a one stop shop for its consumers. Traditionally, food and grocery counted for the largest share of the retail segment, but with the organized sector gaining momentum, the share of verticals has witnessed a change with the maximum share being taken by the apparels segment. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 11 of 56
  • 12. Fig: Share of Verticals in overall and organized retail Source: Assocham & Yes Bank 2012 Food and grocery segment accounts for more than two – thirds of the overall retail in India with a share of approximately 70% of the total market size However, the Organized Retail Penetration (ORP) in this vertical is the lowest at 2.4%. This vertical is dominated by kirana stores (mom and pop stores), cart vendors and wet markets in the unorganized space. Fig: Sale in Grocery Vs Non Grocery (2006 – 2011) Source: Assocham & Yes Bank 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 12 of 56
  • 13. During the period 2006 to 2011, grocery retailing maintained a steady share between 65% to 68% of the total retail sales and non – grocery retailing accounted for between 32% to 34% of the total retail sales Fig: Sales in store based retailing by category (2006 – 2011) Source: Assocham & Yes Bank 2012 In Store – based retailing, which accounts for 99% of all sales, grocery retailers had the major share in sales with 66% share in 2010 – 11and non – grocery retailers accounted for 34% of the total sales during the same period Sales by grocery retailers grew by 14.8% in 2010 – 11 and that of non – grocery retailers grew by 12.8% with the overall growth in store – based retailing at 14.1% during the same period Grocery retailers grew at a CAGR of 12.9% over the period 2006 – 11 whereas non – grocery retailers grew at 12.1% during the same period. Store – based retailing as a whole grew at a CAGR of 12.6% during 2006 – 11 In absolute terms grocery retailers grew by 84.3% and non – grocery retailers grew by 72.5% between 2006 and 2011, with the overall growth of the store – based retail segment pegged at 80.1% The Indian retail market has traditionally been dominated by the mom and pop stores which made major household goods available in the immediate vicinity. But with the advent of new concepts which are better organized, the sales can be seen shifting towards the modern retail stores. However in no case, do these formats have the potential to completely wipe out the existence of these kirana stores as they do not reach the smallest towns of the country. Even in the metro cities the location of the traditional and modern formats is totally varied. Furthermore, the Indian consumers tend to do a lot of impulse buying, for which the traditional format is preferred. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 13 of 56
  • 14. Fig: Sales in Grocery Retailers by Category: 2006 – 2011 (INR Bn) Source: Assocham & Yes Bank 2012 Independent small grocers such as kirana stores remained the largest channel for grocery retailing in 2011, representing almost 68% of the total sales, and growing at 13.8% in 2010 – 11 with a CAGR of 11.8% during 2006 – 11 Hypermarkets saw a strong and steady growth in 2011, growing by 18.2% and had a CAGR of 37.9% between 2006 and 2011 Supermarkets also witnessed strong growth in 2011 with a 13.3% increase and a 16.2% CAGR between 2006 and 2011 Convenience stores saw the maximum growth in Modern retail formats at 27% in 2011 Fig: Sales in Modern Grocery Retail by Category (INR billion) Source: Assocham & Yes Bank 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 14 of 56
  • 15. Fig: Sales in Traditional Grocery Retail by Category (INR billion) Source: Assocham & Yes Bank 2012 Value sales of the traditional grocery retailers accounted for 98% of sales in 2011 Traditional grocery retailers as a whole grew at 14.8% during 2010-11 whereas as modern grocery retailers exhibited a growth of 16.8% during the same period In CAGR terms, the growth of Modern grocery retailers was almost double at 25.6% during 2006-11 as compared to that of Traditional grocery retailers which was 12.8% during the same period The total contribution of modern grocery retailers expanded to 2% of overall sales value in grocery retailing, from less than 1% in 2005 Fig: Percentage Value growth in Sales (2006 – 2011) Source: Assocham & Yes Bank 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 15 of 56
  • 16. In its recent stages, the retailing segment has come up with various new forms of selling to the consumers. Broadly classified under Store based retailing viz the traditional form of retailing which is limited to the presence of a physical store. Non store based retailing has developed recently with e–commerce gaining traction. However, the share of sales of non store based retailing has been quite low but is on a gradual increase with the increasing literacy levels and changing lifestyle of the Indian population. Store based retailing accounted for the major share of sales in retail by category and comprised nearly 99.2% of all retail sales in 2011 Store based retailing grew by 14% during 2010 – 11 as compared to 33.3% for non – store retailing Overall the retail sector grew by 14.2% during 2010 – 11 Over the period of 2006 – 11, store – based retailing grew at a CAGR of 12.6% as compared to 24.5% for non – store retailing whereas the CAGR for the retail sector as a whole was 12.7% for the period 2006 – 11 Overall, store – based retailing has grown by 81.2% in absolute terms in the period 2006-11 and non-store based retailing has grown by a phenomenal 200% during the same period. The retail sector as a whole has grown by 82% in absolute terms from 2006 to 2011. Fig: Sales in Retailing by Category (INR Billion): 2006 – 2011 Source: Assocham & Yes Bank 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 16 of 56
  • 17. 3. Chapter 3 – FDI Policy in Retail 3.1. Understanding the term FDI (Foreign Direct Investment) Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in this regard had issued a notification, which contains the Foreign Exchange Management Regulations, 2000. This notification has been amended from time to time. Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry, Government of India is the nodal agency for monitoring and reviewing the FDI policy on continued basis and changes in sectoral policy / sectoral equity cap which goes from 26% to 100% at present. The FDI policy is notified through Press Notes / Policy Circulars by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP) Ministry of Commerce & Industry. FDI is allowed under Direct Route and Government Approval Route. The foreign investors are free to invest in India, except few sectors / activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required. FDI in retail sector is allowed through Government Route only. 3.2. Evolution of FDI policy in Retail PWC‘s 15th Annual Global CEO Survey indicated that half of CEO‘s in developed countries believed that emerging economies are more important to their company‘s future. With the developed markets witnessing an economic turmoil, emerging countries are fast becoming the retail hotspot for foreign players. In the past five years, retail chain giants such as Walmart, Tesco and Metro Group, saw revenues in developing countries grow 2.5 times faster than their home markets. In light of the Globalization trends, the Indian Government had been anticipating, the introduction of a Foreign Direct Investment Policy for the Indian Retail Sector, however amidst severe criticism from conservative political opposition, the approval of the policy has undergone a long waiting period. Finally after several years of debate, a somewhat structured FDI policy has been announced by the current Government in September 2012, permitting FDI in Single Brand Retail Trade, and Multi Brand Retail Trade, laying out several conditions, conceptually believed to be for the protection of the traditional retailer, and the indigenous farmer. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 17 of 56
  • 18. Fig: Evolution of FDI policy in Indian Retail Sector Source: Recreated from IBEF 2013 & Deloitte 2013 3.3. Structure of FDI Policy in Retail Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which has further been revised in 2011 and 2012 vide Press Note 1 of 2011 dt.14.2011, Press Note 2 of 2011 dt. 1.10.2011, Press Note 3 of 2011 dt.8.11.2011, Press Note 1 of 2012 dt.10.1.2012, FDI Policy Circular 1 of 2012 dt. 10.4.2012, Press Note 2 of 2012 dt. 31.7.2012, Press Note 3 of 2012 dt. 1.8.2012 and Press Notes 4, 5, 6, 7 & 8 dt. 20.9.2012 provides the sector specific guidelines for FDI with regard to the conduct of trading activities. Press Notes 4 & 5 dt. 20.9.2012 particularly pertains to the FDI policy for Retail Sector. Detailed guidelines are available in the following press notes. a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route in 2006. b) FDI up to 100 % with prior Government approval (i.e. FIPB) for retail trade of ―Single Brand‟ products, subject to Press Note 4 (2012 Series) c) 51% FDI is permitted in Multi Brand Retailing in India under Government Route (Press Note 5 of 2012). Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 18 of 56
  • 19. 3.4. FDI Policy in Single Brand Retail Trade (SBRT) Paragraph 6.2.16.4 of 'Circular 1 of 2012 – Consolidated FDI Policy', effective from April 10, 2012, relating to single – brand product retail trading, presently reads as follows ―6.2.16.4 Single Brand product retail trading under 100% Government Route 1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. 2) FDI in Single Brand product retail trading is subject to the following conditions: a. Products to be sold should be of a 'Single Brand' only b. Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. c. 'Single Brand' product-retail trading would cover only products which are branded during manufacturing d. The foreign investor should be the owner of the brand. e. In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'. 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self – certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain. 3) Application seeking permission of the Government for FDI in retail trade of 'Single Brand' products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The application would specifically indicate the product, Product categories which are proposed to be sold under a 'Single Brand'. Any addition to the product, product categories to be sold under 'Single Brand' would require a fresh approval of the Government. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 19 of 56
  • 20. 4) Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the FIPB for Government approval‖ Revision dated 20/09/2012 ―Revised Position w.e.f.20.9.2012: 2.1 The Government of India has reviewed the position in this regard and decided to amend paragraphs 6.2.16.4 (2) (d) & 6.2.16.4 (2) (e) of the existing policy. 3.0 Amendment to paragraph 6.2.16.4: 3.1 Accordingly, paragraph 6.2.16.4 of 'Circular 1 of 2012Conso1idated FDI Policy', effective from April 10, 2012, is amended, as below: 6.2.16.4 Single Brand product retail trading under 100% Government Route. 1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. 2) FDI in Single Brand product retail trading would be subject to the following conditions: a. Products to be sold should be of a 'Single Brand' only. b. Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. c. 'Single Brand' product-retail trading would cover only products which are branded during manufacturing. d. Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing / Franchise / sub – license agreement, specifically indicating compliance with the above condition. e. In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. This Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 20 of 56
  • 21. procurement requirement would have to be met, in the first instance, as an average of five years total value of the goods purchased, beginning April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. f. Retail trading, in any form, by means of e – commerce, would not be permissible, for companies with FDI, engaged in the activity of single-brand retail trading. 3) Applications seeking permission of the Government for FDI in retail trade of ‗Single Brand‘ products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The applications would specifically indicate the product / product categories which are proposed to be sold under a ‗Single Brand‘. Any addition to the product / product categories to be sold under ‗Single Brand‘ would require a fresh approval of the Government.‖ 3.5. FDI Policy in Multi Brand Retail Trade (MBRT) 51% FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof with the following conditions: 1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions: Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded 2) Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million. 3) At least 50% of total FDI brought in shall be invested in ‗backend infrastructure‘ within three years of the first tranche of FDI, where ‗backend infrastructure‘ will include capital expenditure on all activities, excluding that on front – end units, for instance, back end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure etc 4) Expenditure on land cost and rentals, if any, will not be counted for purposes of back end infrastructure Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 21 of 56
  • 22. 5) At least 30% of the value of procurement of manufactured processed products purchased shall be sourced from Indian ‗small industries‘ which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‗small industry‘ for this purpose. This procurement requirement would have to be met, in the first instance, as an average of five years total value of the manufactured processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. 6) Self-certification by the company, to ensure compliance of the conditions at serial nos. (2), (3) and (4) above, which could be cross – checked, as and when required. Accordingly, the investors shall maintain accounts, duly certified by statutory auditors. 7) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal / urban agglomeration limits of such cities. Retail locations will be restricted to conforming areas as per the Master / Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking. In States / Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal / urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master / Zonal Plans of the concerned cities and provision will be made for requisite facilities such as Transport connectivity and parking. Table: FDI in retail trading – snapshot of recent policy changes Previous FDI Policy Revised FDI Policy Single Brand Retail Trading (SBRT) FDI upto 100% permitted under FDI upto 100% permitted under Government Government approval route subject to approval route Liberalization of conditions onerous conditions w.r.t  Ownership of ‗brand‘  Local sourcing obligation Multi Brand Retail Trading (MBRT) FDI was prohibited in MBRT, except FDI upto 51% permitted in MBRT, under in Cash & Carry Wholesale Trading Government approval route, subject to specified conditions  Presently possible only in specified states / union territories Source: BMR Taxand 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 22 of 56
  • 23. 3.6. FDI Policy E – Commerce 100% FDI has been permitted in E – commerce under the automatic route E-commerce understood as activity of buying and selling through the E – commerce platform Only Business to Business (B2B) E – commerce permitted As per recent policy, companies engaged in SBRT and MBRT are not permitted retail trading by way of E – commerce To provide B2C services, several foreign investors have adopted structures involving tie – ups with domestic online retail websites Status is unclear if E – commerce includes M – commerce (mobile commerce) Need for separate policy / guidelines for E – commerce distinguishing it from retail trading 3.7. Acceptance of FDI Policy by Indian States The main opposition party of India and its allies constantly opposed the introduction of FDI in multi – brand retail in 2012. Some of the ruling party allies such as DMK, UDF (Kerala) were also against the policy. States in Favor of 1. 2. 3. 4. 5. 6. 7. 8. 9. Maharashtra Haryana Andhra Pradesh Rajasthan Jammu & Kashmir Uttrakhand Manipur Assam Delhi States Opposing 1. 2. 3. 4. 5. 6. 7. 8. Gujarat Uttar Pradesh West Bengal Bihar Tamil Nadu Kerala Chattisgarh Odisha Source: Source: Deloitte 2013 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 23 of 56
  • 24. However, post elections in Karnataka, Madhya Pradesh, and Chhattisgarh, these states may change their stance on FDI in MBRT depending on who comes to power. The principal opposition party supported the FDI in Multi-Brand Retail when it was in power at the Center in 2002. Further, many of the current allies who oppose the policy are still supporting the UPA Government. 4. Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other countries To understand the impact of FDI in retail on other nations similar to India in terms of demographics and various macroeconomic factors, major impacts on countries like China, Thailand, Indonesia, Brazil, Russia and Mexico can be compared. 4.1. China China developed its open door policy in the aspect of FDI in retail in order to take a transition from a ―planning‖ to a ―market‖ economy. Following has been the series of events with respect to FDI in retail in China: i. FDI in retailing was allowed in China for the first time in 1992. Foreign ownership was initially restricted to 49%. ii. In December 2004, the Chinese government lifted all the restrictions on FDI in Retail. iii. After liberalization of the retail sector in China (1996 – 2001), following changes took place a. Over 600 hypermarkets were opened between 1996 and 2001 b. The number of small outlets increased from 1.9 million to over 2.5 million c. Number of traditional retailers in China also increased by around 30% d. Employment in the retail increased from 28 million people to 54 million people. Employment in the retail and wholesale trade increased from about 4% of the total labour force in 1992 to about 7% in 2001. e. The country witnessed an average GDP growth rate of 8% after the introduction of FDI in Retail f. Inflation rate decreased to -0.8% and -1.4% in 1998 and 1999 respectively. Now after 20 years, inflation rate is at 2% rather than 14.6% and 24.2% in 1993 and 1994. g. The total FDI inflow & outflow in retail also increased significantly after the introduction of FDI in retail leading to increased trade openness. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 24 of 56
  • 25. 4.2. Thailand FDI in Retail was introduced in 1997 in Thailand. However, many adverse effects of FDI in retail were observed. Thailand permits 100% foreign equity, with no limit on the number of outlets. Following has been the series of events with respect to FDI in retail in Thailand: i. Traditionally, wet market and small family owned grocery stores dominated the Thai Retail industry. After the Asian crisis in 1997, the entry ban on foreign players was removed and soon, the foreign players increased and developed their operations significantly. Eventually, most of the local players had to close down their business. ii. However, there were certain positive effects as well: a. Expansion of organized retailing and soon Thailand emerged as a major shopping destination for global travelers. b. The Agro and food processing industry received huge encouragement and lead to enhancement of exports iii. Impact on macroeconomic factors: a. GDP growth rate of Thailand plummeted to -10.5% in 1998 due to the shutting down of local retailers. b. Unemployment rate remained low. c. Inflation rate also remained at 0.3% d. The openness indicator reached its maximum in 2002. e. FDI inflows increased to 7.3 Bn in 1998. 4.3. Indonesia Modern retail was introduced in Indonesia in the 1990‘s and mostly involved domestic chains. FDI in retail led to the multi – nationalization and rapid consolidation of the supermarket sectors. Following is the sequence of events with respect to FDI in retail in Indonesia: i. Currently, Indonesia permits 100% foreign equity in retail business, with absolutely no limit on the number of outlets. ii. In 1958, the leading chain Matahari started as a small shop, and expanded into a chain of department stores, and was then bought by a giant banking and real estate conglomerate Lippo Group in 1997. Between 2002 and 2006, Matahari doubled its sales, becoming a billion-dollar chain. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 25 of 56
  • 26. iii. Impact on macroeconomic factors a. A deep economic recession in 1997 – 98 led to inflation of 80% during the mid 1997 b. During the same period, the GDP growth plunged to -13% c. The Indonesian Government introduced a wide range of institutional reforms and a redirected monetary policy towards maintaining price and exchange rate stability. Eventually, price stability was reinstated. d. Export, imports and the real exchange rate remained consistent e. There was an increasing effect of FDI in retail on the total FDI inflows in retail. However, FDI outflows in retail dropped after 1994. 4.4. Brazil The Impact on macroeconomic factors since the opening of FDI in retail in Brazil (1994) has been as follows: i. According to a report by CUTS International, since opening up to the foreign investment in 1994, the traditional small retailers managed to increase their market shares by 27% ii. The annual GDP growth remained stable and positive iii. The unemployment rate decreased after 1994 after its maximum at 9.6 iv. After 1994, the Brazilian currency (Real) appreciated with respect to U.S Dollar v. The value of exports and imports too increased after 1994 vi. In 1998, the total FDI inflows in retail reached their peak 4.5. Russia Russia witnessed a supermarket revolution in 2000‘s. In 2002, sales of the top – 15 retail chains in Russia amounted to $2.7 billion, by 2006, the sales of these chains surged to $19.2 billion. The share of the top – 3 retail chains jumped from about 40% in 2002 to 54% in 2006. Sales from foreign retailers stood at 33% in 2002 and 35 % in 2006 leading to 8 foreign chains being amongst the top 15. The Impact on macroeconomic factors since the opening of FDI in retail in Russia has been as follows: i. The GDP growth has been positive ii. Since 2000, the unemployment rate has decreased. iii. After 2002, a sharp increase was observed in FDI inflows and outflows in retail. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 26 of 56
  • 27. 4.6. Mexico Until the early 1990s, nearly all the retail sales in Mexico were dominated by domestic chains. Mexico opened its doors to foreign retailers in 1991. By 2002, 48% of the $24 billion from retail sales was accounted by the top – 7 chains. By 2006, the sales from these top – 7 chains nearly doubled to $38 billion, and out of which 53% was by foreigners. The Impact on macroeconomic factors since the opening of FDI in retail in Mexico has been as follows: i. With the influx of foreign retailers in 1991, few major retail stores started dominating the market, and many of the smaller retailers were made to shut down. By 2001, only 4 chains dominated the market: a. Wal-Mart de Mexico(Walmex) with almost half (45.6 percent) b. Comerical Mexicana with a little over a fifth (20.6 percent) market share c. Gigante with 15.5 percent share d. Soriana with 14 percent share ii. The GDP rate has been consistent except in 1995 when it reached -6.2 iii. Wal-Mart took over nearly half of Mexico's retail business with just over 200,000 employees iv. The unemployment rate increased to 6.9 in 1995 v. Though the value of exports and imports was consistent throughout but the exchange rate was seen fluctuating after 1991 vi. An increase in the total FDI inflows in retail was observed 5. Chapter 5 – Impact of FDI in Retail in China 5.1. Impact on Farmers As per a research paper by Kaanan Gupta in 2012, on ―FDI in multi brand retailing – Lessons from China‖, the operations of the global supermarkets in China indicated that the entry of foreign retailers did not make much difference to the producer‘s share in the consumer‘s rupee. Due to the sheer size and buying power of foreign supermarkets, the producer prices did get a bit depressed, however, they were compensated in the long run. As per the research paper; for a farmer from Hebei province in China, who grew vegetables on a 0.67 hectare plot of land, the opening of retail had increased, not reduced his client base. He had direct sales in a Beijing neighborhood every evening, while also supplying to a supermarket chain. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 27 of 56
  • 28. Further there had been an impact in improving the productivity of farmers, by increasing the size of their landholdings. For another instance, each household in Hebei, had between 0.06 and 0.13 hectare of cultivable land, but as more farmers moved to the cities for work, they rented out their land to those farmers who stayed behind. However, consolidation of the retail sector in China, as a result of the government – supported rise of local retail giants in order to protect them from foreign retailers, had put many small farmers who could not cope with lower prices, out of work. 5.2. Impact on Organized Retail China's largest retail chains in 2010, were all Chinese companies — the Shanghai Bailian group, Suning Home Appliances, Gome Home Appliances and Dashang Group, all had bigger sales than Walmart in China. Table: Top 10 Chinese Retail Chains 2010 Rank Name of Company Sales (Bn. US$ ) Number of Stores Operational Format Region of Origin 1 Suning Appliance Group 24.76 1,342 Electronics Specialty China 2 Gome Electrical Appliances Company Limited Bailian Group Company Limited 24.55 1,346 Electronics Specialty China 16.43 5,809 China 4 Dashang Group Company Limited 13.66 170 5 Vanguard Company Limited 11.38 3,155 6 RT-MART International Company Limited Carrefour Société Anonyme (China) 7.96 143 Supermarket, Department Store, Convenience Store, Home Improvement Supermarket, Department Store, Electronics Specialty, Home Improvement Supermarket, Department Store, Convenience Store, Drug Store, Food and Beverage Supermarket Taiwan 6.66 182 Supermarket France 8 Anhui Huishang Group Company Limited 6.42 2,915 Supermarket, Department Store, Convenience Store, Electronics Specialty China 9 Wal-Mart Stores, Incorporation 6.34 219 3 7 China China Supermarket Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective US Regions of Operation More than 300 cities in all regions, Hong Kong, Japan More than 200 cities in all regions 20 provinces and cities in China Northeast China, North China and West China 27 provinces and cities in China 21 provinces and cities in China 21 provinces and cities in China 50 cities in China 20 provinces and cities in Page 28 of 56
  • 29. 10 (China) Chongqing General Trading (Group) Company Limited 6.06 319 Supermarket, Department Store, Electronics Specialty China China Chongqing, Sichuan, Guizhou Source: Kaanan Gupta 2012 This was primarily because the global retail giant‘s strengths in their home countries were based on factors that are totally absent in other countries. For instance, Wal-Mart was able to drive costs down because of its incredible logistics and supply chain networks, which were absent in China. Further the physical infrastructure like roads and ports were not as developed in China, to the same level as they are in the US and thus it did not provide the kind of scale that they require to negotiate and bargain with the suppliers and drive down the cost. Post liberalization, competition became cut-throat in the supermarket and the hypermarket segment of China‘s retail segment. By 2010, the largest player in the supermarket segment, the China-based Shanghai Bailian Group (with 5,809 stores in 2010), constituted only 11% in terms of market share. Even Wal-Mart which dominates the retail market in the United States, occupied only around 6% market share in China, despite of the fact the big – box retailer had set up shop nearly 15years ago in the country. RT-Mart International Limited, a Taiwan-headquartered company was the biggest retailer on the Chinese mainland with 6.3% market share until mid-2011, attracting more than one-fourth of households in the mainland market. The French retail giant Carrefour Group, the world's second-largest retailer by revenue held a 4.9% market share during 2010. Tesco Public limited company, the world's third-largest grocer by revenue, had a 2.1% market share in China over the year 2011. CR-Vanguard Group saw its market share rise from 6.2% in the second quarter of 2010 to 6.7% in the second quarter of 2011. The overall number of foreign retail stores in China in the Top 100 increased by 25.64%, exceeding the 11.49% of Chinese retail stores in 2010. There were 135 newly-opened stores of the six major foreign supermarket operators in 2010, up 22.77% over the previous year. Among the Top 100, foreign retailers had a sales growth of 18.09% in 2010, vs 25.3% sales growth of Chinese retailers. 5.3. Impact on Traditional Retail Since the opening up of Retail sector in 1992, China has attracted huge investments without affecting either the small retailers or domestic retail chains. In fact, between 2004 – 2010, the number of small Chinese outlets had increased to around 2.5 million from 1.9 million. It was because the market was so large and growing so quickly that even today, hypermarkets, convenience stores and other examples of Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 29 of 56
  • 30. organized retail make up less than half of the urban food market. In China, unorganized retail, represented by street vendors and neighborhood ―community retailers‖, continued to thrive, offering cheaper prices than supermarkets and retail chains. Further, the products which are offered at a lower price by modern retail are less relevant for the poor who buy them loose in small quantities. Likewise, the presence of big global retailers in rural China is also much smaller. Certainly consolidation of the retail sector in China, as a result of the government-supported rise of local retail giants like Bailian, has put many small retailers who could not cope with the surge in number of competitors and lower prices, out of work. Nevertheless, the job losses in China have not been felt because of the pace of urbanization and the growth of cities. 5.4. Impact on Supply Chain Though it is somewhat perceived that in China, the global big – box retailers have mostly focused more on opening stores in a drive to capture the market share, there has not been much investment in making supply chain improvements and operational efficiencies. Wal-Mart has a 40,000 square meter, central distribution centre in Kengzian (China) and Carrefour uses a different approach, it relies more on local distributors to deliver direct to the stores to reduce the cost of developing its supplier network and supply chain. Yet, almost two decades after China opened up retail fully, the sector has seen rapid growth against the backdrop of increased market consolidation, higher production efficiency enabled by rising investments in rural infrastructure and booming exports made possible by the setting up of new supply chains. 5.5. Impact on Consumers It is evident that the entry of global retail giants heats up the competition, giving consumers a better deal, both in prices and choices. Mega retail chains need to keep price points low and attractive – that is the USP of their business. This is done by smart procurement and inventory management, good practices. For Chinese consumers the attractions of hypermarkets are low prices and one stop shopping for food and general merchandise. China‘s middle class consumers visit hypermarkets once every 10 days on average. While hypermarkets are gaining market share among food retailers, the majority of consumers still bought food at supermarket stores and traditional open markets, especially in rural areas where supermarkets do not exist. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 30 of 56
  • 31. 6. Chapter 6 – Critical Analysis of Impact of FDI in Retail in India 6.1. Impact on Farmers Since the early 1990s, supermarkets have revolutionized retail sector in developing countries. In order to reach the mass market, supermarkets have now developed beyond the middle class and upper class segments. This process has affected not only the traditional retailers, but a much broader spectrum covering the wholesale, processing, and farm sectors within the entire supply chain. With respect to quality, costs, volume, consistency and commercial practices, supermarkets require more from suppliers when they modernize their procurement systems. Supermarkets affect suppliers in a biggest way for foodmanufacturing enterprises, since some 80% of contents sold by supermarkets comprise of processed, staple, or semi-processed products. In order to suffice the requirements desired by their clients, Supermarkets have to support small farmers with training, credit, equipment, etc when they are unable to source from large scale or medium scale farmers, and the small farmers lack the much needed assets. The farmers in this way are not only be able to increase their output but also get better rewards in terms of supplying to organized retailers by tying up long term contracts with them. With the entry of Global retail giants, the farmers across India‘s 6,00,000 villages are expected to gain with higher profits and better market access. As the competition increases, the farmers would get good prices for their harvest. The original producers would get a higher price for their produce, since the profit will flow to them directly, leaving behind the middle men. This is anticipated to happen as the giant retailers have more access to capital and a high buying power. Direct purchase from farms will hugely benefit small farmers who are not getting good returns by selling in the local wholesale market. The payments will be made directly to the producers and will be free from commission agents. In turn these large retailers will also benefit by saving 10 – 15% in commissions by purchasing fruits and vegetables directly. An Empirical analysis carried out by Sinha & Singhal (March 2013) shows that farmers tend to earn from 20% to 50% more in net terms when they enter direct supermarket channels. For example, net profit was 33% –39% higher among supermarket channel participants compared to traditional market participants amongst tomato farmers in Indonesia. However this would require more up – front investment by the farmers to meet greater demands for quality, consistency, and volume compared with marketing to traditional markets. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 31 of 56
  • 32. FDI in multi – brand retail is an important step to push more growth in the sector. Case studies of MNC‘s helping farmer communities in India like PepsiCo India‘s potato farming program and Bharti Wal – Mart‘s initiative through Direct Farm Project and several others suggest that opening of Indian retail sector to FDI is a win – win situation for farmers. Farmers would benefit significantly from the option of direct sales to organized retailers. Global majors such as Wal-Mart, Carrefour and Tesco are expected to bring a global scale in their negotiations with the MNCs such as Unilever, Nestlé, P&G, Pepsi, Coke, etc. The improved cold chain and storage infrastructure will no doubt lead to a reduction in losses of agriculture produce. It may also lead to removal of intermediaries in the retail value chain and curtail other inefficiencies resulting in higher income to a farmer. 6.2. Impact on Traditional Markets It is being anticipated that with the advent of major organized retail players in India, the existence of traditional mom and pop stores will be in question. However, there is a theory that analyses co – existence. The size, complexity and diversity of retail industry is a huge advantage for the smaller players in India, however most of the organized retailers have opened shop in the Metros, Tier 1 and Tier 2 towns. This has been the main reason, believed to be preventing the liberalization of the FDI norms for Indian retail for very long. Political oppositions have time and again argued: a) Adverse affect by the entry of global retail giants: Since these retailers have advanced capabilities of scale and infrastructure along with being cash rich, this may result in the loss of jobs for people in the Indian unorganized sector. b) Better operational efficiencies of the organized players: Lower product prices by global giants may hamper the profit margins of the unorganized players. On the contrary some theorists believe, Multi – brand retail, if allowed, can transform the retail sector in the following significant ways: a) Firstly, the organized players are expected to bring in the much needed investment which will help the domestic retailers that don‗t have the resources to sail through, during economic crisis. b) Infrastructure support extended to improve the backend processes would enable to eliminate such extreme wastages and enhance the supply chain operational efficiency. c) FDI in multi – brand retail would in no way endanger the jobs of the people employed in the unorganized retail sector. It would rather lead to the creation of millions of jobs as massive Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 32 of 56
  • 33. infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban Indian who is keen on allocating the disposable income towards organized retailing like big box stores along with the local kirana stores. These stores would be able to retain their importance owing to their unique characteristics of convenience, proximity and skills in retaining customers. Also, these would be more prominent in the Tier-II and Tier-III cities where the organized supermarkets would find it harder to establish themselves. Another way of approaching the problem is to analyze if the growth in market share by the International Retailers will kill the Independent Retailers. Technopak advisors in their white paper on ―FDI‘s Impact on Indian Retail sector and Indian Economy‖ (October 2012), have suggested that Corporatized retail is expected to grow its share from the current 7% to nearly 20% in the next decade. By 2021, this will translate into USD 162 billion in revenue for corporatized retail. Table: Comparison of Corporatized, Independent and International Retail Estimated merchandise consumption (USD Bn) Share of Independent Retail Size of Independent Retail Share of Corporatized Retail Size of Corporatized Retail Share of Indian Corporatized Retailers in total Corporatized Retail Share of International Retailers or International Retailers assisted Retail Size of International Retailers (USD Bn) 2001 120 96% ~115 ~4% 5 ~100% 2012 490 93% 436 ~7% 34 ~95% 2021 810 80% 648 ~20% 162 50% 50% 80 Source: Technopak 2012 In 2011, the total revenue of all hypermarkets (largely international retailers) in China was USD 80 billion including the revenues of Walmart, Carrefour, Tesco and other regional players. This is after a 15 year long journey for these retailers, in China. Optimistically, if it is assumed that retail sector reforms in India will lead to the creation of a similar scale for these players then, in 2021, all the international retailers in India can at best aspire for a USD 80 billion revenue share. This translates to approx 50% of the total revenues (USD 162 billion) coming from organized retail in 2021, with Indian corporatized retailers contributing the balance. This further translates to around 10% of the total retail market each for international and Indian corporatized retailers by 2021. Technopak‘s analysis therefore assumes that international retailer‘s share of the Indian retail sector would be no more than 10% in the next 10 years, even in a best – case scenario. Even with this being the case, 90% of the retail sector will still be attributable to independent retail or Indian corporatized retail. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 33 of 56
  • 34. 6.3. Impact on Consumers India is now home to the largest number of moneyed consumers. One of the key drivers in the growth in retailing is the increased consumer demand resulting due to the growth of consumer groups with disposable income between USD 2,500 and USD 10,000 per annum which grew from 47% in 2010 to 50% in 2011. The strongest impact of organized retailing would be seen on these consumers. Along with the increase in disposable income and increased discretionary expenditure, the consumers will get better choice of formats. Due to the Direct Procurement model followed by organized retailers, there would be substantial cost savings through disintermediation which would ultimately benefit the consumer. Fig: Illustration for effect of direct procurement on Farmer and Consumer Price. Source:Assocham & Yes Bank 2012 The Indian consumers will soon have the luxury of world class opportunity of shopping to meet the requirements of their daily life. They will find a new world of enjoyment of picking up consumer items to their greatest satisfaction. Big retailers will often allow discounts on selected items which will facilitate the consumers and they can end up with marginal bargains. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 34 of 56
  • 35. 6.4. Impact on Supply Chain As per Industry estimates 35 – 40% of India‘s total production of fruits and vegetables and nearly 10% of food grains, is wasted every year due to inadequate storage and transport facilities. Lack of adequate storage facilities causes heavy losses to farmers in terms of quality degradation and wastage of produce in general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over INR 1 trillion per annum, 57% of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions. Though India is the second largest producer of fruits and vegetables (about 200 million MT), it has a very limited integrated cold – chain infrastructure, with only 5,386 stand-alone cold storages, having a total capacity of 23.6 million MT. It is estimated that India is already facing a shortage in Cold Storage space by about 9 – 10 million MT. Moreover, the existing cold storage facilities now available are mostly for a single commodity and around 80% of them are utilized for potato storage resulting in poor capacity utilization. Since Indian agriculture is witnessing a major shift from traditional farming to horticulture, meat, poultry and dairy products and the demand for fresh and processed fruits and vegetables is increasing due to rising urban population and transforming consumption habits, the role of cold storages becomes critical. Further, the warehousing capacity available in India, in public, co-operative and private sector is about 108.75 million MT and another 35 million MT warehousing capacity is required during the Twelfth Five Year Plan period for the storage of all major crops. This clearly indicates to the huge demand supply mismatch. Moreover, the warehouses in our country have been built following traditional norms and without proper specifications. They lack in optimal size, adequate design, ventilation facility, inventory management and storage system. Almost half of this wastage can be prevented if fruit and vegetable retailers have access to specialized cold storage facilities and refrigerated trucks. Though FDI is permitted in cold – chain to the extent of 100%, through the automatic route, in the absence of FDI in front – end retail, investment flows into this sector have been insignificant. The opening up of FDI in Retail will bring in investments in this field compulsorily as the modern retail formats will procure large quantities to gain economies of scale and will try to avoid wastages due to improper storage facilities. As the business of organized retailing of food matures, it would increase private investment in the area of supply chain infrastructure. The organized retail will bring in efficient practices that will help farmers in the procurement process, reduce wastage with finally efficient storage and will finally cut the losses. The giant retailers will help Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 35 of 56
  • 36. India to have strong storage system with highly developed transportation. This is also going to get a boost from the various schemes of the Government to incentivize rural infrastructure creation (Terminal Markets, Mega Food Parks, Rural Godowns etc.). This will benefit the farmers immensely by creating feasible and competitive marketing alternatives for their produce. Giant retailers with decades of experience on how to manage mountains of inventories, supply them to key distribution centers and do it all faster, better, cheaper. The arrival of foreign retailers will definitely bring in synergies in distribution management practices. Agricultural value chains have increasingly become complex over time. Market requirements rapidly change, driven by increasing demand, changing lifestyles and government policies. In response to these changing market requirements, value chains need to become more coordinated leading to more integration and concentration to achieve efficiency and minimize risks. Product and market standards change with time which in turn, require changes from various factors in the value chain that supply these products to meet market requirements. But this has not been the case with the Indian Agriculture supply chain which has by and large remained the same over the years, not incorporating the required changes for development and increased efficiency. The farmers in India receive a share of less than 30% for most of the food grains and 15% – 20% for horticultural produce, while in developed countries the share comes to around 50% – 70% for most of the commodities. This is basically because of the large number of intermediaries involved in the chain. Intermediaries, no doubt are an essential part of the chain and they add value to the commodities and help in aggregation. But this intermediation should essentially be limited to the level where value is actually being added. In India unnecessary intermediaries get involved along the chain resulting in margin payouts at various levels and losses due to multiple handling. The margins taken by the intermediaries are generally product specific and are higher for fresh produce, having shorter shelf life. For grains and cereals, around 28% margin is added to the cost, before the produce reaches the processors. Further costs are added when the produce is processed and passes through the Mandis. This cost accounts for a 12% increase. These margins considerably increase the prices of grains and cereals for end consumers. Similar is the case with fruits and vegetables where significant margins are added up to the cost of produce. But these margins are significantly higher in case of Fruits and Vegetables owing to their shorter Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 36 of 56
  • 37. shelf life and greater perish ability. In case of fresh fruits and vegetables, around 47% margin is added to the cost of produce before it reaches for processing. Further margins are added up during processing and movement through different levels in Mandis. Generally, the prices of the produce double in such cases. Entry of players in the organized retail tends to make the supply chain more effective and efficient by:  Sourcing directly from the farmers or at least closer to the farm gate and eliminating the unnecessary intermediaries. This in turn results in better price realization to the farmers.  Overall, farmers are bound to gain from the advent of the organized food retailers under a proper regulatory environment promoting direct procurement on one hand and machinery to prevent the exploitation of farmers on the other hand.  Direct procurement also gives the farmers certain indirect benefits like knowledge of what needs to be produced when, technological inputs and access to credit on account of assured market etc.  FDI in retail will eliminate or greatly reduce the role of middlemen and ensure a sustainable and reasonable price for both the farmer and the consumer by shortening the supply chain through increase in direct purchase  The players in the organized retail sector will put in all efforts to reduce wastage at all levels by a substantial amount. FDI will bring in a spurt of investments in latest technologies for storage, handling, processing and market information.  Fair grading weighment and payment would be the key areas of benefit for the farmers. This will also encourage the farmers to grow better quality produce as it would command better prices. The payment structure in most of the organized retail is prompt and inclusive of the cost of transportation. This is a great benefit to the farmer.  As the organized retail focuses on good quality products, adulteration of food will be kept under check.  There is a greater deal of transparency in organized retail and monitoring is much easier. On the farming front retailers can partner with farmers to enhance their farming practices by providing access to Finance, technical support and inputs. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 37 of 56
  • 38. Fig: Efficiency in Supply Chain Source:Assocham & Yes Bank 2012 6.5. Impact on Employment Employment generation in the retail sector is a function of size and productivity within the sector. As we are aware that the productivity norms differ between independent and corporatized retail thus an assessment needs to be made to analyze the respective shares of independent and corporatized retail, mapped against the respective productivity norms in order to determine the net impact of both independent and corporatized retail on employment. India is home to approx 15 million points of sale, or shops, of which a majority are run as standalone entities owned and operated by members of the same family. These ―independent retail‖ shops thus provide employment to family members and also paid employees. Almost all the paid employees in these shops are part of an informal workforce and as such have no minimum wage or fixed working hours. Employment in this segment averages approx 1.5 employees per shop. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 38 of 56
  • 39. On the other hand, employment in corporatized retail comprises employees working on the shop floor, clerks manning the billing counters, security guards and employees in central / corporatized functions. The productivity norms for employment in corporatized retail are a function of sales per square feet, or sq. ft., and employees per sq. ft. In 2001, the share of corporatized retail in the retail sector was under 5% and the remaining 95% was constituted by independent retail. By 2011, the share of corporatized retail grew to 7% and is projected to grow further to 20% by 2021. Table: Relation between Retail & Employment GDP (USD Bn) Estimated merchandise consumption (retail market opportunity) (USD Bn) Share of Independent Retail (USD Bn) No. of direct employees in Independent Retail (Mn) Share of Corporatized Retail (USD Bn) No. of direct employees in Corporatized Retail (Mn) 2001 450 120 115 18 5 0.1 2012 1958 490 455 22 34 0.7 2021 3310 810 648 32 162 3.3 Source:Technopak 2012 The above table shows the relation between share of independent and corporatized retail viz the number of direct employees in the respective segment. It is evident that independent retail has added 4 million jobs in the last decade. In the next decade, while corporatized retail is expected add another 2.6 million jobs, independent retail will also create 9 million more jobs. We can hence conclude, contrary to the belief that opening of FDI in retail will lead to a loss of jobs in traditional retail, rather it can be inferred that opening up the retail sector will create new jobs in corporatized retail, but the extent of this job creation will be limited by corporatized retail‘s inability to grow its share in total merchandise retail, and the Independent retail sector will however continue to add many more employment opportunities. 6.6. Impact on Inflation We have seen above that the supply chain for retail operations comprises product development, merchandising, vendor development, logistics, warehousing, in-store selling etc. Inarguably, retailing requires scale, precision and efficiency in the supply chain for retailers to be profitable. Retailers do this by integrating the supply chain thus ensuring that quality merchandise is delivered faster without damage or leakage of any kind. The efficient working of this supply chain reduces the costs incurred in making goods reach the consumer. This reduction in the distribution cost of merchandise is passed on to the consumer through a lower retail price for that merchandise. Thus, it contributes positively in reducing inflation. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 39 of 56
  • 40. However, it is important to understand the various categories that make up merchandise retail and the contribution of corporatized retail to each of these categories. Food has the largest impact on consumer price inflation. This is validated by the fact that today 70% of merchandise retailing comprises food & groceries. Therefore, mapping the share of corporatized retail in dispensing food merchandise will give an objective picture of corporatized retail‘s ability (present and future) to tame inflation. Table: Share of Retail Segments Food & Groceries Apparel Others Total Retail USD Bn 343 38 110 490 2012 Corporatized Retail (Share of Total Retail) 10 (3%) 6 (16%) 17 (15%) 34 (7%) Total Retail USD Bn 486 62 262 810 2021 Corporatized Retail (Share of Total Retail) 24 (5%) 11 (17%) 125 (48%) 162 (20%) Source:Technopak 2012 For simplicity, merchandise retail is broadly classified into three categories - Food & Groceries, Apparel, and Others (Jewelry & Watches, Electronics, Home Improvement, Pharmacy, Footwear etc.) While 70% of total merchandise retail comprises Food & Groceries, only 3% of Food & Groceries is retailed through corporatized retail. This scenario is not going to change much in the coming decade. While, corporatized retail‘s share will register an impressive growth in other categories, Food & Groceries will prove to be a challenge. By 2021, the share of corporatized retail in Food & Groceries retail is expected to grow by a mere 2 percentage points, to around 5%. This is largely to do with the market structure on the supply side of the Indian economy. This market structure will not allow corporatized retailers to integrate their food & groceries supply chain. The lack of direct access to farmers for sourcing, interstate movement of goods, tax structures, and inadequate capacities in the food supply chain will act as the chief barriers to this integration. The inability of corporatized retail to grow its share in food & groceries retail can therefore limit its impact in achieving the intended objective of taming inflation to a very large extent. 6.7. Impact on Government Revenue from Taxes There is a positive relationship between the increase in tax receipts and the increasing share of corporatized retail. Most retail transactions conducted in the 15 million shops of Independent retailers in India are in cash. This provides a significant leeway for a parallel economy to thrive. There are tax (VAT) leakages via under – invoicing or non – reportage of sales. The structure of independent retail also provides enabling conditions for the trade of spurious and counterfeit goods. With an increasing share of Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 40 of 56
  • 41. corporatized retail, the probability of such leakages would diminish leading to an increase in the certainty of tax receipts which will provide the respective State Governments with extra revenue, which can be better utilized in the development of other infrastructure. Table: Tax Revenue from Retail 2001 120 4% 5 0.5 Total Merchandise Retail (USD Bn) Size of Organized Retail Size of Organized Retail (USD Bn) Tax revenue @ weighted average tax rate of 10% (USD Bn) 2012 490 7% 34 3.4 2021 810 20% 162 16.2 Source:Technopak 2012 7. Chapter 7 – SME sector’s viewpoint on impact of FDI policy in Retail As per a survey conducted by CII (Confederation of Indian Industries) during December 2011 and January 2012, on the impact of FDI on SME‘s, which was based on a large sample size of 250 companies covering different categories of SME‘s according to sales turnover, from different regions of the country including SME‘s with a turnover of Rs. 25 Lakhs to Rs. 1 Crore Rs. 1 Crore to Rs 5 Crore Rs 5 crore to Rs. 25 Crore Rs. 25 Crore and Rs. 100 Crore and above The CII Survey confirmed that almost 96% of the respondents from the SME sector were aware of the Government‘s earlier decision to allow 100% FDI in single brand retail and 51% FDI in multi-brand retail and also of the latest notifications issued thereafter. The SME Industry, according to the survey, was in favor of the government‘s decision to allow 51% Foreign Direct Investment (FDI) in multi-brand retail and 100% in single brand retail. A majority of the SME companies that were Fig: In favor of FDI in Multi Brand Retail surveyed, had supported the government‘s decision and the notification allowing 100% FDI in single brand retail and about 52% of respondents were hoping for an early implementation of 51% FDI in multi-brand Source:CII Survey 2012 retail. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 41 of 56
  • 42. On the question how the SME industry Fig: Entry of MNC Retailers – Opportunity or Threat considered the entry of MNC retailers as a threat or opportunity, majority of respondents (66.7%) saw it as an opportunity for their sector while around 21 % of respondents perceived it as a threat. About 12.5 % of respondents were of the opinion that the decision would have little or no Source:CII Survey 2012 impact on their company. The CII survey also tried to find out and make an assessment of the impact of the opening of FDI in retail on SME‘s in terms of different growth indicators / parameters like sales, size of the industry / capacity expansion, employment, branding and achieving other efficiencies: - 7.1. Impact on Sales Majority of the respondents (93.7 %) were of the opinion that, opening of the FDI in retail will result in growth of sales of their products. Of them, around 21% respondents believed that the impact on the growth of sales of their product would be in excellent range (> 20%), 31% of the respondents perceived the impact on growth of sales to be in the high range (10 – 20%), 33 % expected it to be in a moderate range (5 – 10 %), 8 % felt the growth to remain in a low range (0 – 5%) and the balance 6 % felt that the decision would have a negative impact on the growth of sales of their products. Fig: Growth in sales of product Source:CII Survey 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 42 of 56
  • 43. 7.2. Impact on Size of Industry, Business / Capacity Addition On the aspect of the possible impact on the size of the industry, business and capacity addition, majority of the respondents (97.9 %) expected the size of their Industry / company to grow with the opening of FDI in multi – brand retail and single – brand retail. Around 22.9% of the respondents perceived that their industry would grow by an excellent rate (> 20%), 25% of the respondents expected the impact to be in the high range (10 – 20%), while 33% expected the growth to be in the moderate range (5 – 10%), and 22% felt the growth to be in the low range (0 – 5%). A significantly negligible 2% of the respondents felt that the decision would have a negative impact on the growth of size of their industry and business. Fig: Growth in size of Industry, Business / Capacity Addition Source:CII Survey 2012 7.3. Impact on New Orders / Contracts Majority of respondents (95.8%) were of the opinion that the decision of opening of the FDI in retail would impact them positively in the form of new orders / contracts generated. Around 31% of respondents expected the new orders and contracts to grow substantially with more than excellent rate (>20 %), 27% expected the impact to be in the high range (10 – 20%), while 31% expected it to be in the moderate range (5 – 10 %). Around 6% perceived the growth to be in a low range (0 – 5%), however 4 % felt that the decision would have a negative impact on the growth of size of the industry in terms of new orders and contracts. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 43 of 56
  • 44. Fig: Growth in New Orders / Contracts Source:CII Survey 2012 7.4. Impact on Qualitative improvements and branding of products On the condition of mandatory sourcing of 30% from the SME Sector, over 56 % of the respondents were of the view that the government‘s decision will help in achieving qualitative improvements and branding of their products. This in turn, will ensure SMEs in receiving a sure source of market and higher value realization for their products / supplies. It will also provide for expansion of their scales of production, facilitating domestic value addition in manufacturing, thereby creating a multiplier effect on employment, technology up gradation, income generation, demand and further investment. 7.5. Impact on Supply Chain efficiencies Around 68% of the respondents surveyed, were of the opinion that Fig: Improvement in Supply Chain the opening up of retail would lead to improvements in the supply chain efficiency within their sector, which in turn will integrate small and medium size enterprises with the modern trade process, resulting in substantial amount of knowledge and skill transfers in the sector. However, 17% believed that there would be no impact, and 15% were not sure if the decision could have any impact on the supply chain at all. Source:CII Survey 2012 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 44 of 56
  • 45. 7.6. Impact on Employment Around 48% of the respondents were of the opinion that the Fig: Impact on Employment decision would have a positive impact on the employment in their sector whereas 35% expected no change in the scenario. Around 16% believed the impact on the employment in the SME sector to be negative. Source:CII Survey 2012 8. Chapter 8 – Analysis of Current Entry Structure in line with FDI Policy Regulations Many global retailers like Walmart, Metro, Ikea, Carrefour, Woolworth, Staples, etc which have been wanting to establish and capture some market share in India are now trying to leverage on the policy of 100% in cash and carry wholesale and 51% in multi-brand retailing. Similarly retailers like Debanham, Espirit, Nokia, Zara, Mark & Spencer, Hamleys etc. are leveraging policies based on single brand retailing model. Significant foreign retailers‘ presence is seen in Apparel, Fashion, Luxury and food retailing using either the franchise or licensing route. Recently many global players like Amazon, Groupon, etc are taking advantage of online retailing and hence are targeting Indian consumer by setting up relationship with supply chain companies to deliver products to end customer therefore bypassing the need to create physical retail stores. To target Indian consumer, identical efforts are expected by other leading global retailing giants leveraging on 3G and smart phone apps, spreading virally on internet, and social networking platforms. 8.1. Entry structure for Foreign Retailers India now provides an opportunity for retailers seeking to make investment in the emerging economies to participate in the growth and increase their global presence. The nascent stage of organized retail penetration in India and the shortage of availability of cash for expansion will prompt more business activity in the sector. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 45 of 56
  • 46. Fig: FDI entry options in Retail at a glance Source:BMR, Taxand 2012 Retail sector requires significant capital investment. However, currently viable funding is not easily accessible Suggested modes of FDI involvement would be in the following formats: Equity: Likely to be the main source of funding Indian operations Offshore Debt / External Commercial Borrowings: Regulatory restrictions on end-use of foreign borrowings will pose a severe challenge. Foreign debt has also not been permitted in single-brand retail model However, Offshore debt may be possible for multi-brand retail companies for establishment of cold storage and warehousing facilities Hybrid Securities: Some ‗hybrid securities‘ which are classified as ‗equity‘ from a regulatory perspective will form an interesting format for FDI participation. Formats like CCD‘s, FCD‘s (fully and compulsorily convertible preference shares and convertible debentures) will become a major source of bringing Foreign money into India. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 46 of 56
  • 47. Ever since the policy on single brand retail policy was announced in 2006, more than 60 brands have set up retail operations in India in strategic joint ventures with Indian partners. Some of these include: Brand Marks & Spencer Fendi Damas Burberrey JV Parner Reliance Retail Chordia Fashions Gitanjali Lifestyle Genesis Color Brand Georgia Armani Ferragamo Inditex (Zara) S Oliver JV Partner DLF DLF Trent Orient Craft Source:PWC, FICCI 2012 Some of the other deals announced recently: Investor SAIF Ventures Tiger Capital, Helion Ventures, Accel India Fidelity Tiger Capital Sequoia Capital India Standard Chartered PE Investee Ink Fruit Letsbuy.com Sector Online apparel site Online consumer durables site Big shoe bazaar India CaratLane.com Lovable Lingerie Privi Organics Online shoe site for wholesale purchases Online jewellery site Innerwear Indian aroma chemical products manufacturer Source:PWC, FICCI 2012 Acquirer Future Venture India Ltd Peter England Ltd Target Big Apple (Convenience Stores) Pantaloons Retail India Ltd Year Sep 2012 Sep 2012 Deal Type Acquisition Acquisition Pantaloons Retail India Ltd Phoenix Mills Ltd Flipkart Online Services Pvt. Ltd. Gitanjali Gems Ltd Shopper Stop Ltd TTK Prestige Ltd TV 18 Pantaloons Retail India Ltd Shoppers Stop Ltd TPG Capital, Bain Capital R & R Salons Classic Housing Projects Pvt. Ltd. eTree Marketing Pvt. Ltd. Crown Aim, China Gateway Multichannel Retail India Triveni Bialetti Pvt. Ltd. On – Graph Technologies Pvt. Ltd. Home Solutions Retail (India) Ltd HyperCITY Retail India Pvt. Ltd. Lilliput Kids wear Ltd. May 2012 Mar 2012 Feb 2012 Dec 2011 Nov 2011 Sep 2011 Jul 2011 Aug 2010 June 2010 Apr 2010 Private Equity Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Acquisition Private Equity Source:IBEF 2013 Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 47 of 56
  • 48. 8.2. FDI policy regulations for Single Brand Retail Trading (SBRT) – an analysis Issue Policy Requirements Impact Ownership of the ‗brand‘  Investor entity need not be the owner of the brand Copy of licensing / franchise / sublicense agreement required to be furnished by investing entity at the time of seeking approval  Inclusion of sub-brands/ differentiated brands/ variants of brands All brands should be retailed together in one or more country outside India Products should be branded during manufacturing All product/product categories to be sold in India need to be specifically mentioned and approved In case of FDI beyond 51%, sourcing of 30% of value of the goods purchased, to be done from India, preferably from MSMEs, village, cottage industries, artisans and craftsmen, in all sectors Condition to be met by the approved retail trading entity Condition would have to be met in the first instance basis average of five years; thereafter, to be met on an annual basis Quantum of domestic sourcing to be self-certified by company (validated by auditors)   Concept of ‗single brand‘     Mandatory  sourcing of 30% products from India in case of FDI beyond 51%           Amendment recognizes IP holding structures established by retail companies Provides opportunity to use investment holding company structures in SBRT Investment by Private equity / financial investors (other than FIIs) Brands owned by a separate legal entity, cannot be consolidated in single store Any addition to product categories would require approval Offers flexibility to foreign retailers for sourcing products May still be a deterrent for foreign investment in trading of high-end technology niche products Existing tie-ups for sourcing built by various foreign companies in India – whether to continue or remodel? Whether products purchased locally should be exported or retailed in India? – needs fact based analysis Source:BMR, Taxand 2012 8.3. FDI policy regulations for Multi Brand Retail Trading (MBRT) – an analysis Policy Requirements Impact Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 48 of 56
  • 49.   Minimum investment – US$ 100 million  At least 50% of total FDI to be invested in backend infrastructure     Sales outlets can be set up only in the States  that agree to allow FDI in MBRT Can only be opened only in cities with  population of more than 1 million (only 53 cities as per 2011 census)     At least 30% of the value of products to be  sourced from Indian 'small industries‘ Small industries defined to include industries having total investment in plant & machinery  not exceeding US$ 1 million Mechanics to compute minimum investment in case of investment at premium or in case of acquisition will pose a question Specialty stores may not be able to meet minimum investment cap Unbundling of back end infrastructure to a group entity would pose difficulty Investor can‘t have pan India presence due to varied state policies / political circumstances Need for developing an appropriate legal and operational structure Significance of cash and carry wholesale trading model to continue – however transactions with retail entity may be subject to scrutiny from a policy perspective Risk of future retroactive change in policy by the Government – could be viewed as breach of bilateral investment protection agreements and constitutional laws Establishing compliance with this condition would be onerous and would require a robust data capture process Potential hindrance to building economies of scale Source:BMR, Taxand 2012 8.4. Impact of regulation – Minimum investment of USD 100 Million Under the revised FDI policy for multi – brand Fig: Snapshot of major retailers in 2010-11 retail, it has been proposed that a minimum Segment Apparel by the foreign entity with a constraint to obtain a maximum stake of 51% in the Indian Joint venture. Mass Grocery This condition acts as a barrier for entry to the foreign retailer, as it implies that the minimum Beauty & Wellness investment required by both, the foreign and the Indian partner together, will be more than INR Existing Player Pantaloon Shoppers Stop Westside Big Bazaar Reliance Fresh Apollo Revenue (INR Cr) 4097 1927 821 6914 7599 860 Stores Tata Eye+ investment of USD 100 million is to be brought in 328 >200 >65 >50 >60 >210 >400 >1350 Source: Deloitte 2013 1200 Cr. (considering 1 USD = INR 60). Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 49 of 56
  • 50. Mass Grocery and Apparel, which are two of the fastest growing organized retail segments where there exist large domestic retailers, could be the potential segments for joint ventures with foreign retailers. However, other segments like will not tend to benefit much from this condition. 8.5. Impact of regulation – 50% of FDI to be invested in backend infrastructure in 3 years Minimum investment of 50% of total FDI (say more than INR 300 Cr) is to be invested in backend infrastructure in the first three years of the first tranche of the investment. Different retail segments have dynamic requirements of backend infrastructure. Mass Grocery needs significant investment in the backend. (For example food processing unit, cold chains, etc.) However, other segments such as Apparel, Beauty & Wellness and Consumer Electronics have limited requirements in the backend. Further, as per the policy, land cost and rentals that might be incurred for warehousing are not included in the definition of backend infrastructure. Hence, meeting this policy constraint would be a challenge for any player in the retail segment other than Mass Grocery. Fig: Backend Infrastructure of major Retail segments Apparel Mass Grocery Beauty & Wellness Consumer Electronics Manufacturing Do not have their own manufacturing units Warehousing Own warehouses in different regions of India Many existing retail chains own processing centers for private label brands Do not own manufacturing units, except few stores such as eyewear Some products of other manufacturers Own distribution centers with cross dock facility and cold chains etc Own warehouses in different regions of India Own warehouses in different regions of India IT Possess IT infrastructure for Inventory Management Possess IT infrastructure for Inventory Management Companies have centralized database management Logistics Outsourced to third parties Possess IT infrastructure for Inventory Management Either outsourced or company owned Own subsidiaries for their logistics (For example Future Supply chain and Reliance Supply) Outsourced to third parties Source: Deloitte 2013 8.6. Impact of regulation – 30% of sourcing from ‗small‘ industries This policy constraint implies that retailers should have at least 30% sales from private label brands or unbranded products sourced from small industries. Existing Mass Grocery retailers in India source many Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 50 of 56
  • 51. products directly from producers and ‗small‘ food processing units. However, suppliers of Consumer Electronic and other specialty stores such as Beauty & Wellness are large size companies. Fig: Sourcing Practices of major Retail segments Segment Apparel Mass Grocery Beauty & Wellness Consumer Electronics Current sourcing practices  Private label apparels – Retailers source fabric and supply them to contract manufacturers of purchase finished garments from low cost suppliers  Other accessories or Non apparel accessories like wallets, handbags, etc are becoming a significant part of total sales for apparel retailers  Increasingly, companies are stressing on a private label portfolio in both grocery and non – grocery retailing because of the high margins (for example, private label constitute approx 25% of total products for Spencer‘s)  Companies are sourcing directly from producers to economize on the price and increase margins (for example Pantaloon‘s retail subsidiary – Future Fresh Foods Limited sources directly from producers)  Retail chains such as Apollo & Guardian have private label brands (Guardian has more than 220 SKU‘s) which offer higher margins  For most OTC medicines, prescription based medicines and beauty products, retailers source from large pharmaceutical companies  Retailers source electronic products directly from the manufacturers and distributors appointed by manufacturers or wholesalers  Even in case of private label brands, majority sourcing happens through foreign shores Source: Deloitte 2013 8.7. Impact of regulation – Only cities with population more than one million Fig: Retailers with stores in cities with population > 1 Mn Only 53 cities in India qualify under this policy condition. This policy constraint restricts the access to retail market in all sub – one million populated cities and towns. More than 80 per cent of stores of various multi – brand retail chains (such as Spencer, Spar, Shoppers Stop, Croma, Titan Eye+ etc.) are in cities with more than one million population. Hence, the policy condition may not significantly affect operations in most of the retail segments. Source: Deloitte 2013 8.8. Impact of regulation – Approval from State Government required There are only 18 cities in India with population Fig: Retailers with stores in states supporting FDI more than one million and the corresponding State Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 51 of 56
  • 52. Government supporting FDI in multi – brand. More than 50% of the existing retailer stores (such as Spencer, Shoppers Stop, Lifestyle, Apollo etc.) are in states not supporting FDI in multi – brand. This policy condition impacts the access to a significant market. Further, limited cities means limited stores and reduces economy of scale. Source: Deloitte 2013 8.9. Impact of regulation – E-commerce not permissible Multi-brand retailers with FDI will not be able to Fig: Retailers using e – commerce use e-commerce, whereas, Indian retailers can use e-commerce as another channel for sales. Most of the existing retailers in Mass Grocery and multibrand Apparel do not use e-commerce to sell their products. Even in specialty retailers such as Beauty & Wellness, e-commerce does not form a significant part of their sales. Hence, this policy constraint should not materially impact operations. Source: Deloitte 2013 9. Chapter 9 – Key challenges for International Players Challenge Description Execution Challenges The advent of FDI policy of September 2012 can pave the way for modernization of the Indian retail sector, however, the journey ahead is challenging. Even well heeled MNC retailers will have to pay heed to the Indian political, social and competitive landscape, if they want to succeed in the Indian retail sector. Hypermarkets require more than 60,000 sq. ft. and departmental stores require more than 20,000 sq. ft. of retail space. Such retail space in prime locations in the big cities is scarce and available only at high rental costs. Availability of Retail Space Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 52 of 56
  • 53. High rental cost The Indian retail rentals have been quoted to be around 300-400 basis points higher than international rentals. Rents in prime properties have increased by 50 per cent in just three years. According to an industry estimate, rentals comprise approx. 40 per cent of total cost of sales in the retail sector. Thus, successful negotiation of rents would constitute a key success factor for MNC retailers Clarification on certain policy features The policy note does not specify whether investment in back end infrastructure needs to be a fresh investment or if foreign companies can buy stakes in already established backend infrastructure. Red Tape – Getting various government approvals Entry of a multi-brand MNC retailer in the retail sector would fall under the approval route. This implies that the MNC retailer would have to go through different layers of Government departments before getting the go ahead. Political Risk The largest opposition party in India has opposed FDI in retail and some of its leaders have indicated that they will scrap the policy if their party comes to power. A political change in state and central governments puts a lot of political risk on investment in retail. One of the major challenges faced by the existing players is the availability of skilled manpower; any foreign retailer planning to enter India will have to face similar challenges Roads, ports, electricity are some of the infrastructure challenges, which increase the operational cost of the retail chain. Skilled Manpower Infrastructure Challenge Currency Fluctuation Way ahead retailer for Right Partner Repatriation strategy international In the past three months, the dollar/INR exchange rate has fluctuated by approx. 8 per cent. This may put considerable currency risk on any foreign investment in India. MNC players need to take cognizance of a host of consumer behavioral issues and policy implications before deciding on their foray into the Indian retail market. The success of the business will be heavily influenced by the choice of partner. International players should partner with players who will help them reach the end customers and possess lucrative front-end retail infrastructure. An established player in the retail market will help bring in customers while the foreign player can used its expertise in supply chain and logistics to further enhance the operational efficiency. Foreign capital invested in India is generally allowed to be repatriated along with capital appreciation, if any, after payment of tax dues on them, subject to other tax and regulatory conditions. Hence, in formalizing a strategy to achieve a tax efficient repatriation, the following aspects/options could be examined in detail: Review of  Review of financial model from a tax perspective Financial Model to eliminate any tax inefficiencies Review of Royalty  In the case of Joint Venture (JV) arrangements for agreements investing in India, review of royalty agreements, if any, from a tax perspective  Suggesting effective tax planning opportunities so as to minimize tax exposures, if any  Analyzing the transactions from tax perspective and complying with the Transfer Pricing (TP) requirements Jurisdiction  Jurisdiction Analysis for tax efficient investing Analysis  Analyzing/following alternatives for structuring Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 53 of 56
  • 54.  Transfer Pricing Planning & Analysis Indirect taxation   investments in India:  Direct investment in India; or  Investment through an Intermediate Holding Company Analyzing mechanism for up-streaming income and alternative exit strategies for repatriation of capital and profits in tax-efficient manner Transfer Pricing planning and analysis for facilitating arm‘s length transactions and proper documentation Indirect taxes play a very important role in deciding the costing and consequently, the pricing model in a supply chain. 10. Chapter 10 – SWOT Analysis Weakness Strengths      Will boost economic development Young and dynamic human resource to take the challenge Will provide better opportunity to farmers, small retailers, local artisans Potential for high growth rate in retail and wholesale trade in India Presence of big business / industry houses which can absorb losses      Opportunity         Scope for major employment generation in future Will improve the financial conditions of farmers Will add to retailer‘s efficiency Foreign capital inflows to the country Will lead to big markets with better technology and branding Quality improvements with cost reduction Increasing the export capacity Increase in lifestyle changes and status consciousness Highly unorganized sector with Low capital investment Lack of trained and educated force Lack of competition Poor infrastructure Heavy wastage due to non availability of sufficient warehouses and cold storage facilities Threats      Some Kirana and mom & pop retailers may lose business in long run Fear of controlling the retail sector by foreign investors / Big stores, as seen in some countries FDI in multiband retail may result in job losses in manufacturing sector Roadside bargains may start which may harm the farmers Farmers can face exploitation and lose their fields and crops to larger foreign investors if not prevented Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 54 of 56
  • 55. 11. Chapter 11 – Conclusion We have critically analyzed above that the advent of FDI in Retail is expected to benefit our country in many ways. A few of them have been summarized below: Organized retail sector will grow from current 8% to over 20% by 2015, contributing more than USD 160 Bn to the Indian Retail sector This will lead to investment worth billions of Dollars in the Indian economy Food & Grocery segment will attract a higher share of FDI inflows (in value), benefiting from scale, and leading to technology and back – end infrastructure up gradation Other segments like fashion apparel, beauty and wellness, consumer durables, etc will also benefit Giant global retailers will add competition to the market, however, considering the vastness and diversity in India, they will pose very little threat to Traditional Retail Knowledge and Information flow from Global retailers, due to their diverse experience, will immensely benefit Indian retailers Capital investment expected to be made in backend infrastructure will address present problems of inadequate infrastructure, inefficient supply chain, involvement of multiple middlemen, increased wastage, and higher cost Investments in technology and introduction of best management practices by Global retail giants will ensure enhancement of productivity Farmer realizations will inadvertently improve due to reduction in crop wastage, direct sourcing and better supply chain efficiencies Local and small scale manufacturers and artisans falling under the definition of ―small‖ industries will benefit by the policy regulation of mandatory sourcing Consumers will benefit having a wider and world class shopping opportunity, with lower prices due to optimum utilization of producer surplus, and increase in competition The continuous problem of rising inflation is expected to come under control Retail sector in India which is estimated to be amongst the top 5 employers after agriculture, will get a tremendous boost by participation of Global Companies, searching for the right talent New skill set of ‗retail jobs‘ will be added to the current employment scenario. Professional institutes will introduce specialized post graduate degrees in retail management. Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 55 of 56
  • 56. Apart from specific skill category, the sector will demand huge resource base from managerial, operational, and other fields leading to a huge opportunity for employment The Governments will benefit by collecting taxes, which have been missing due to the nature of the unorganized sector, leading to extra revenues that can be spent on developing better infrastructure, and other facilities Though the benefits of FDI in retail are expected to be many, however, the topic has been subjected to fierce political debates and controversies, leading to only 9 states presently agreeing to accept the policy. The policy introduced, has not been very well appreciated by the Global retail community, finding the regulations to be extremely tough and not well structured. For a policy that has taken years to be introduced, a better and more pragmatic approach could have led to a higher acceptance level. Considering the sector to be relatively nascent, we are hopeful, that the years to come will pave way for developing the sector into a major contributor to the country‘s growth. 12. Chapter 12 – References Sno. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Title India Retail Market, Opening more doors – January 2013 by Deloitte Consulting Group India Retail Sector Report – 2013 by Michael Page Retail Report Retail – March 2013 by IBEF (India Brand Equity Foundation) FDI in Retail in India: An Empirical Analysis, March 2013, by Pankaj Sinha & Anushree Singhal FDI in Retail: An Objective Assessment of FDI‘s impact on the Indian Retail Sector and the Indian Economy, October 2012, by Technopak Advisors Foreign Direct Investment in India‘s Single and Multi-Brand Retail: New Opportunities & Developments, October 2012, by Sannam S4 & BDO Advisors The Indian Kaleidoscope: Emerging trends in Retail, September 2012, by FICCI & PWC FDI in Retail, Advantage Farmers – October 2012 by Assocham & Yes Bank Understanding India‘s new policy on FDI in retail – October 2012, by BMR Advisors Impact of FDI in Retail on SME Sector, a survey report by CII (Confederation of Indian Industry) FDI in Multi-brand Retailing: Lessons from China – 2012, by Kaanan Gupta, CCS Working Paper No. 258 Non Summer Research Internship Program 2012 Centre for Civil Society Foreign Direct Investment in Indian Retail Sector Pros and Cons – 2012, by K.R. Kaushik, Dr. Kapil Kumar Bansal, International Journal of Emerging Research in Management & Technology Indian Retail Sector – March 2011, Resurgent India India Retail Report 2013, Images Group News Papers: Economic Times, Business Standard, Financial Express Magazines: Retailer, Franchise India, Estate Avenues Websites for reference: www.indiaretail.com, www.wikipedia.org, www.deloitte.com/in, www.michaelpage.co.in, www.ibef.org, http://mpra.ub.uni-muenchen.de/, www.assocham.org, www.bmradvisors.com, http://cii.in/, www.ccs.in Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 56 of 56