FDI in Multi-brand Retail (Issues and Challenges)


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In the year 2012 India faced severe balance of payment and trade deficit. This forced to bring about changes in Foreign Direct Investment [FDI] policy. India is the top most attractive economy for FDI among the rest of economies in world. The government has allowed FDI in to retail outlets owned by their domestic partners in a limited way for on?selling to retail customers. This provides a window to them for benefiting from the retail boom in the country. The present study aims to understand and analyze the challenges and opportunities faced by FDI Inflow and the future outlook towards FDI in multi brand retail Sector. It extrapolates that inward FDI can intensify competition and accelerate the process of innovation in the local Retail Sector. This paper tries to establish the need of the community to invite FDI in multi brand retailing. The final decision in this respect is yet to be taken by the government of India.

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FDI in Multi-brand Retail (Issues and Challenges)

  1. 1. FDI in Multibrand retail
  2. 2. The commitment of money or capital to purchase financial instruments or assets in order to gain profitable returns.FDI in Multibrand retail
  3. 3. Refers to the physical Investment made by a foreign investor belonging to a certain country into a sector of foreign nation. It is the transfer of foreign assets into a country’s financial account. This can be done in four ways :1. By acquisitions and mergers2. By incorporating a wholly owned subsidiary3. By being part of a joint venture and4. By acquiring at least 10% share in the domestic company If the share acquisition is less than 10% then it wouldn’t be called FDI then it would be known as PORTFOLIO INVESTMENT. FDI in Multibrand retail
  4. 4. ForeignInvestment done by citizens and Investment government of one country through (home country) invest in industries of another country (host country). Foreign Foreign Direct Institutional Investments Investors FDI in Multibrand retail
  5. 5. RETAILINGIn 2004, The High Court of Delhi defined the term ‘retail’ as a salefor final consumption in contrast to a sale for further sale or processing(i.e. wholesale). A sale to the ultimate consumer.It is the interface between the producer and the individual consumerbuying for personal consumption. This excludes direct interface between the manufacturer andinstitutional buyers such as the government and other bulk customers.Retailing is the last link thatconnects the individualconsumer with themanufacturing and distributionchain. FDI in Multibrand retail
  6. 6. Front End Front EndOperations Back End OperationsOperations Store Logistics & Procurement Corporate Merchandising MarketingOperations Distributions / Purchase Services FDI in Multibrand retail
  7. 7. RETAIL SECTORFDI in Multibrand retail
  8. 8. FDI Policy In Indian Retail SectorSingle Brand Retail Trading 100%Multi-Brand Retail Trading 51% FDI in Multibrand retail
  9. 9. FDI Policy Initiatives1991: Up to 51% FDI allowed in priority sectors.1997: 100% FDI allowed in cash & carry wholesale trading.2003: Germanys Metro becomes the first foreign company to set up cash & carrywholesale store in Bangalore.2006: 51% FDI allowed in single brand retail, cash & carry wholesale tradingapprovals eased.2007: Wal-Mart announces agreement with Bharti Enterprise to set up wholesale Joint Ventures.2008: Tesco enters into an exclusive franchise agreement with Trent, retail arm of the Tata group.2009: Bharti-Walmart opens its first cash & carry wholesale store in Amritsar.July 2010: Discussion paper on FDI in Multibrand retail trading published, evokes mixed response. FDI in Multibrand retail
  10. 10. December 2010: Carrefour opens its cash & carry wholesale store in Delhi.November 2011: Indias central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi- brand retailers such as Wal-Mart, Tesco as well single brand majors such as Nike, and Apple.December 2011: Under pressure from the opposition, Indian government placed the retail reforms on hold till it reaches a consensus.January 2012: India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30 percent of its goods from India. FDI in Multibrand retail
  11. 11. FDI POLICY- OVER THE YEARS FDI in Multibrand retail
  12. 12. The marketing of two or more similar and competing products, by the same firm under different and unrelated brands. While these brands eat into each others sales, multi-brand strategy does have some advantages as a means of1. Obtaining greater shelf space and leaving little for competitors products.2. Saturating a market by filling all price and quality gaps.3. Catering to brand-switchers users who like to experiment with different brands.4. Keeping the firms managers on their toes by generating internal competition. FDI in Multibrand retail
  13. 13. In-principle approval granted for increase in FDI in single brandretail from 51% to 100% under the approval route. This is subject to,inter alia, the following conditions:1. Products to be sold under the same brand internationally.2. Foreign investor must be the owner of the brand.3. Single brand retail would cover only products branded duringmanufacture.4. For FDI above 51%, 30% sourcing must be from SMEs. FDI in Multibrand retail
  14. 14. In–principle approval has been granted for FDI in multi-brand retail up to51% under the approval route. This is subject to, inter alia, the followingconditions:1. Minimum amount to be brought in by the foreign investor to be USD 100million.2. At least 50% of the total FDI must be invested in back-end infrastructure(includes capital expenditure on all activities, excluding front-end units.Excludes expenditure on land cost and rentals).3. 30% procurement of manufactured/ processed products must be fromSMEs.4.Government to have first right on procurement of agricultural products. FDI in Multibrand retail
  15. 15.  It means that global retailers such as Wal- Mart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity. The issue arises that Wal-Mart, Carrefour and Metro already have stores in India but these are wholesale cash-and-carry stores where only institutions or Kirana shops can buy — not consumers. FDI in Multibrand retail
  16. 16. WHY INDIA ????1. We are the second highest producer of fruits and vegetables in the world but still we are not able to utilize it properly because of inadequate infrastructure facilities.2. It will reduce pre-harvest wastage/losses and thus help control food inflation.3. It will create 1.5 million more jobs in 5 years. Apart from the huge number of indirect employment.4. It will increase competition which is always beneficial for the customer.5. It will remove the middleman from the equation. It will reduce costs which in turn will reduce prices. FDI in Multibrand retail
  17. 17. PROPOSAL AS FINALISEDBY GOVERNMENTA decision has been taken by the Government to permit FDI in all products, in acalibrated manner, subject to the following conditions:• FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with Government approval.• Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.• Minimum amount to be brought in, as FDI, by the foreign investor, would beUS $ 100 million. FDI in Multibrand retail
  18. 18. • At least 50% of total FDI brought in shall be invested in back-endinfrastructure’.• At least 30% of the procurement of manufactured/ processed products shallbe sourced from Indian small industries which have a total investment inplant & machinery not exceeding US $ 1.00 million. This valuation refers to thevalue at the time of installation, without providing for depreciation.• Retail sales locations may be set up only in cities with a population of morethan 10 lakh as per 2011 Census and may also cover an area of 10 kms aroundthe municipal/urban agglomeration limits of such cities.• Government will have the first right to procurement of agricultural products. FDI in Multibrand retail
  19. 19. • Indian retail sector :  Employs 8% (35 million) of the working population.  Could yield 12 to 15 million retail jobs in the coming five years.• Out of which organized segment is about 0.3 million.• Retail sector grew at 9.4% on real terms & 15.4% on nominal terms. FDI in Multibrand retail
  20. 20. • FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand Retailing was, however, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010.• FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997.• Trade is an important segment in Indias Gross Domestic Product (GDP).As per the National Accounts, released by the Central Statistical Organization (CSO), GDP from trade (inclusive of wholesale and retail in organized and unorganized sector), at current prices, increased from Rs 4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of 16.2 per cent. FDI in Multibrand retail
  21. 21. • As per the National accounts, private final consumption expenditure, increased from Rs 19,26,858 crore in 2004-05 to Rs 32,26,826 crore in 2008-09, at an average rate of 13.8 per cent per annum However, expenditure on some items like transport and communication; expenditure on food in hotels and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation are distinct from trade.• When seen at constant 2004-05 prices, however, private final consumption expenditure increased from Rs 19,26,858 crore in 2004-05 to Rs 26,51,786 crore at an average rate of 8.3 per annum.• Private consumption expenditure adjusted for items like transport and communication etc. increased from Rs 11,92,045 crore in 2004-05 to Rs 16,67,286 crore in 2008-09, at an average rate of 8.8 per cent. FDI in Multibrand retail
  22. 22. ISSUE 1 : FDI will provide employment-A MYTH1 FDI in multi-brand retail will lead to a mass scale loss and displacement of retail jobs. As per NSSO 64th Round 2007-08, retail tradeemployed 7.2% of total workers and provided job to 33.1 million. FDI inretail, definitely, will challenge the 12 million existing shops and 33.1million employers. The Commerce Minister says 40 lakh people will be directly employed.WalMart has 21 lakh employees worldwide. Their largest store has 214employees. At this rate they have to open 18,000 stores in India. For Tescoor Carrefour, it is lesser; so there are 36,000 stores that need to be opened in53 cities - that is 600 stores per city.Wal-Mart has not been allowed to open a store in Manhattan. Even theNew Yorkers realise that this would lead to closure of stores in Manhattan.The entry of the trading giant, Wal-Mart, led to the closure of 40,000 USfactories between 2001 and 2007, resulting in throwing millions of peopleout of their jobs. FDI in Multibrand retail
  23. 23. ISSUE 2: Condition of Farmers will get worsened Multi Brand Retailers pay farmers and employees less. They never reduce their profits. (EU parliament) Instances about the potato farmers who are forced to throw their potatoes by McDonald’s which imports its own potatoes. MBRs – Benefit Accrue large retailers who drive down the prices.(Chairman of AMUL) “Yeh sarkar vikaas ki seedhi nahi, vinaash kar gaddha hai.” – Sushma Swaraj FDI in Multibrand retail
  24. 24. ISSUE 3: Emergence Of Foreign Middlemen There are instances where there are no middlemen in India.For example, in the sugar sector, the sugarcane farmers arecontracted by sugar mills to sell their produce directly to themills.When FDI comes in India, MBR will act as new middlemen.To say that middlemen will no longer exist is totally wrong.There may be many faults in our rural market (aarat) systemthat need fixing. But there is a bond of trust between the farmerand the traders in the market and that cannot be denied.The traders (middlemen)are the farmers traditional ATM. FDI in Multibrand retail
  25. 25. ISSUE 4: FDI in retail - devil lies in the detail No to front-end stores but welcome the foreign retail chains toopen factories and warehouses.MBR’s business will be confined to state allowing FDI only,self contradicting.50% of FDI must find its way into back-end operationsanywhere in India.Parking and Connectivity – different kettle of fish.Inverting Natural Sequence FDI in Multibrand retail
  26. 26. ISSUE 5: The dubious benefits of FDI in retailWal-Mart faced allegations of bribery that helped it set up stores muchahead of its competitors within Mexico. This resulted in violation ofMexican law and the US Foreign Corrupt Practices Act.The bargaining power of the global trading giant with the Governmentsis so high that it eventually puts pressure on State finances, through tax-breaks, effective outsourcing models to kill production jobs.The savings due to shopping at Wal-Mart cannot compensate for theloss of job opportunities and income.Foreign investment, in the last two decades, has contributed less than 5per cent to the economy, while the real wealth creation has come fromthe household sector, which includes proprietary and partnership firms. FDI in Multibrand retail
  27. 27. ISSUE 6: 100% FDI in Cold Storage- A Dream WastageWastage as per 2010, 25-30% in fruits and vegetables and 5-7% infood grains. 80 million toons of fruits and vegetables go to waste due to lack ofcold storages. ISSUE 7: FDI- 21st East India Company Remember East India Company. It entered India as a trader and then took over politically. FDI in Multibrand retail
  28. 28. ISSUE 8: FDI, a welcome to Chinese Market Sooner or later, Giant retailers will import from CHINA to lower downthe cost of products.According to the US Census, between 1992 and 2007, the imports fromChina to US tripled in value from $9 billion to $27 billion! According tothe US Census. FDI in Multibrand retail
  29. 29. FDI in Multibrand retail
  30. 30. FDI in Multibrand retail
  31. 31. In Retail, over 70 per cent of the labor force in both sectors combined (organized and unorganized) is either illiterate or educated below the primary level.COMPETITION A strong competition from mom and pop shops:- Easily accessible & approachable. Provide services like Free home delivery and goods on credit. They change consumer focus.MARKET POWER Potential of Indian Market is US$ 200 billion whereas India is just earning its 3%. FDI in Multibrand retail
  32. 32. • TAXATION & STRINGENT APPROVALS •Taxation laws in India favors only small retail businesses. •Implementation of non-uniform VAT across states. •Octroi and entry tax in some states.•INFLATION EFFECT ON INDIAN RETAIL INDUSTRY Challenge to get Disturbed Liquidity more customers economic status. pressure at low cost. FDI in Multibrand retail
  34. 34. 1. Domestic companies may lose their ownership to overseascompanies.2. Small enterprise may not compete with the foreign playersand may ultimately be edged out of business.3. Large giants of the world may monopolies the highlyprofitable sector. FDI in Multibrand retail
  35. 35. In the final analysis, for India, FDI in multi-brand retail should beseriously considered by the government and, as with many othersensitive sectors (like defense), a gradual opening up could be madepossible. Despite country wide speculation on the plight of smallretailers, India needs to take a lesson from China where organized andunorganized retail seem to co-exist and grow together.In our view, the government has an opportunity to utilize theliberalization for achieving certain of its own targets: improve itsinfrastructure; access sophisticated technologies; generate employmentfor those keen to work in this sector FDI would lead to a morecomprehensive integration of India into the worldwide market and, assuch, it is imperative for the government to promote this sector for theoverall economic development and social welfare of the country. If donein the right manner, it can prove to be a boon and not a curse. FDI in Multibrand retail
  36. 36. FDI in Multibrand retail