Dinodia capital advisors fdi in multi brand trade the journey
FDI in Multi Brand Retail Trade – The Journey Dinodia Capital Advisors September 2012
Executive Summary For more than a year, every problem in India has been blamed on the incumbent government by national and international lobbies and “Policy Paralysis” has been the reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high inflation, high interest rates and delayed capital expenditure plans On September 14, 2012 the government broke the shackles and came out with the much needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the Multi-brand Retail Sector (MBRT) of India with a surety of no roll – back this time Dinodia Capital Advisors’ view is that these reforms will create price competition and remove the multiple layers of inefficiency between the farmers and the final retailer and hopefully help the farmers and producers of goods realize a bigger share of the pie in the long-run Given the current negative sentiment of foreign investors (post Vodafone and Draft GAAR Guidelines) and the lack of capital inflows in India, these reforms will encourage foreign firms to give India a serious look and encourage them to invest capital in the country As foreign firms who partner with local Indian firms are able to generate profits and achieve success in India it will encourage FDI in other sectors as well and create a positive 2 image for India globally as a good place to do business!
The Story So Far…. Union Cabinet approved 51% FDI in multi-brand retail Increasing the FDI limit in single brand retail to 100% However the implementation was deferred, for evolving a broader consensus on the subject DIPP had put up a discussion January paper proposing FDI in multi-brand retail DIPP notified the decision to allow 100% FDI permitted in cash & carry, FDI in Single brand wholesale trading comes under retail the automatic route September FDI in single brand retail was Union Cabinet approves permitted to the extent of 51% 100% FDI being the FDI limit in Multi permitted in cash & brand retail of 51% carry wholesale trading under the government approval route 3*DIPP: Department of Industrial Policy and Promotion
The Policy - Single Brand Retail Trading EARLIER NOW For Single Brand Retail Trading (SBRT) FDI in single brand retail trading is permitted sector – only 51% FDI permitted – subject up to 100% with Government approval to approvals and conditions such as: Products should be of a ‘Single Products to be sold should be of a ‘Single Brand’ only Brand’ only Products to be under the same brand 30% sourcing is to be done from micro and in one or more countries if are sold small industries (investment in Plant and outside India Machinery not exceeding US $ 1mm) ‘Single Brand’ products should be This condition will ensure that SME sector, branded during manufacturing including artisans, craftsman, handicraft and cottage industry gets the benefits of The foreign investor should be the liberalization owner of the brand 4
The Policy - Multi Brand Retail Trading EARLIER NOW FDI in Multi Brand Retail Trading was not FDI in Multi Brand Retail Trade is permitted up allowed to 51%, subject to following conditions: Outlets to be set up - only in cities with a population of more than 1m (within a 10km range)* Minimum investment by the foreign investor - US $100mm and at least 30% of the procurement of manufactured / processed products shall be sourced from small industries’ (investment in Plant and Machinery not exceeding US $1million) Sourcing requirements will be checked together for first five years – after that on a annual basis Retail trading by means of e-commerce – not permissible At least 50% of total FDI brought in shall be* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana,J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and invested in ‘back-end infrastructure’** withinDadra Nagar Haveli three years of the induction of FDI 5** Back-end Infrastructure includes supply chain, logistics and warehousing butnot land and rentals
SWOT Analysis of FDI in RetailS W TRENGTHS EAKNESSES • Retail is a $450bn Industry in • High capital investment required India in the retail sector (real estate) • Young and dynamic manpower • Lack of trained and educated • Highest shop density in the world work force • High growth rate in retail & • Higher prices as compared to wholesale trade local shops • Presence of big industrial houses • Will mainly cater to high-end with deep pockets consumers placed in metrosO T PPORTUNITIES HREATS • High employment generation in • Effect on the small retailers - local the future Kirana stores (mom-pop stores) • Will enhance financial condition of • Long gestation period - Foreign farmers Retailers will take a while to adapt • Encourage foreign capital inflows to India and generate profits • Result in increasing supply-chain • States not buying in so efficiency efficiencies expected may not be • Improve Logistics & Infrastructure achieved 6
Rough ride so far….. It is not easy to be successful in a place where culture, tradition and food habits change every 124 miles Some of the largest and most prominent Indian business houses such as Reliance, Godrej, RPG and the Future Group have all struggled in the Retail Industry in India 1. These large players have lost a significant amount of money and in fact one of the leaders in the space, Subhiksha, which at one time had almost 1,600 outlets has shut down India’s image is one of a “fickle policy maker” with regulations being frequently changed, rolled back and even retrospectively amended have made investors speculative Subsequent populist decisions are feared, such that the foreign retailers may not be able to achieve dominant market positions or buy / rent at the right locations 1 In order to read a detailed report on the Indian Retail Industry please visit:http://www.dinodiacapital.com/research.asp 7
Hidden Opportunity despite the rough ride A comparison of the Retail Industry in Emerging Markets shows that India actually has the lowest organized retail sector amongst its peers and therefore is the biggest opportunity India’s closest peer in terms of size of population, China, has an organized retail market that is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th of India in terms of population has a organized retail market of almost 6x of that of India and mostly homogeneous tastes across the country making it easy to standardize offerings Indonesia which is the largest economy in Southeast Asia and often cited as replacing India as the “I” in BRIC economies has displayed strong growth in 2011 and in the first half of 2012 with significant growth in the Retail sector. It has only 1/5th of India’s population and yet has a organized retail sector which is 5x of that of India There are two ways to look at the above data. One is to see that there are plenty of emerging markets where more capital could be deployed in retail, but the other is to see the hidden opportunity in investing in the retail sector in India (the 2nd largest country in the world in terms of population) where there is a white canvas and wide spaces and the story of organized retail can be painted in whichever way the potential foreign entrants desire 8
Global Experience of FDI in RetailEmerging Markets which allowed FDI in Retail with the share oforganized retail in the overall retail industry: 9Source : Goldman Sachs, Technopak
Proposed Business Model Outcome: -There is a possibility of a mutually symbiotic relationship between the Foreign and Indian Partner to jointly harness their capabilities and create a world-class Retailer in India, which will have the unique advantage of a being the first mover and establishing the benchmark of excellence for the Industry 11
The ride despite the speed breakers … There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign Retailers to co-exist in India The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have a homogenous selection of products across their stores, typically need 150,000 sq feet of space and require a car to get to. India is years away from when majority of its population will have the ability to only shop at the Wal-Marts of the world. Competition will force the Kirana Stores to lift their game, become more price competitive, have a better selection of goods at lower prices and maintain proper records of customers (people will still shop there for proximity, comfort of relationship and easy credit) Foreigners will bring to India their expertise and efficiency in retailing, they will invest capital in improving logistics and infrastructure in India (for example: Cold Storage Logistics is still almost non-existent in India) and share technology and know-how with their local Indian Partners, but will also be able to become profitable over a period of time as their brands and presence increase across the country Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts and just as in Brazil foreign retailers thrive but still a local player is the most dominant (Pao de Acucar) India will see a much more inclusive and efficient Retail Industry 12
The ride despite the speed breakers … On the whole, if India has to grow it needs capital, training and innovation. Yes the short-term effects of the announced reforms will be painful, but in the long-term if they will help make Retail a more organized industry in India, provide better quality goods at cheaper prices at convenient locations, improve infrastructure and the supply chain mechanism throughout the country, provide employment and retail sector specific training to a large population it will be a huge boon to the nation Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But those who are willing to be patient and make a more long-term bet on India, definitely have the opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing market in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail). The foreign players who are willing to learn from their mistakes in other emerging markets and early experiences in India, go through a careful partner selection process, understand the political / legal / external hurdles and invest with a realistic time horizon truly have an unique opportunity to create win-win situations for all stakeholders. Several other sectors have seen foreign entrants with a successful and profitable model in India (Dominos, Citigroup, Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the 13 times to come!
Dinodia Capital Advisors Dinodia Capital Advisors Corporate Profile Dinodia Capital Advisors is a Financial Consulting firm based in New Delhi, India. It assists clients across all industries grow, both organically and inorganically. The firm helps clients Raise Capital. Execute Merger & Acquisition opportunities. Restructure, Transform and Turnaround businesses. Resolve challenging problems. Take advantage of financial and strategic opportunities. Balance investor expectations. DELIVER VALUE 14
Dinodia Capital AdvisorsService Offerings Dinodia Capital Advisors Advice Clients on : Mergers and Acquisition Capital Raising We help in conducting a robust scan We advice clients on their capital of the market and selecting the most needs and find them the right suitable buyer or seller partner who brings more than just capital Restructuring India Entry Strategy We advise on business We help set up and incubate restructurings to help achieve businesses in India, acting as a financial, strategic and operational trusted advisors to facilitate the efficiency India entry strategy Organizational Turnarounds Transformation We work closely with companies to We work with companies to help devise and implement a put systems, processes and turnaround strategy by plugging the people in place to help take deficiencies of management, advantage of both organic and technology, capital or partnerships inorganic synergies 15
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