FDI IN Retail


Published on

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

FDI IN Retail

  1. 1. Indias Retail Conundrum What Foreign Companies Should Know ABSTRACT Inspite of being one of the fastest growing economies in the world, India was pretty slow in terms of opening its retail sector to the world. Now, the wait is over. In September 2012 government of India has permitted 51% FDI in Multi brand retail with the approval from Foreign Investment Promotion Board or FIPB) subject to certain conditions. There is a huge scope for foreign retailers who are looking to enter India for the long term. With its large, educated, aspiring and young middle class population, India is a retailers paradise. But the floodgates havent opened yet. With strict sourcing and investment rid- ers, the current FDI policy needs to be understood in its entirety. Only those re- tailers who have massive technological and logistical expertise will have an ad- vantage in this vast Indian market. Political considerations will have a significant impact of the future of policy decisions in India and global retailers should not ignore it. This research note aims to cover all the aspects of the challenging Indian retail market and also how to approach it.www.mlschase.com For Private Circulation Only
  2. 2. INDEX PageINDIA: Favorable Demographic Dividend 1India’s growing middle class is driving a dynamic, domestically driven economy. Thiswould make India an attractive market for companies to sell into.RETAIL: The Opportunity 2India is one of the top five retail markets in the world. The Indian retail industry is esti-mated to be around $ 450 bn and is expected to grow to $ 660 bn in 2015 and up to $1.3 trn by 2020.FDI POLICY: Single Brand Retail 5FDI POLICY: Multi Brand Retail 6CHALLENGES: 7CompetitionThe Indian retail sector is swarmed by the unorganized retailing with the dominance ofsmall and medium enterprises in contradiction to a few giant corporate retailing outlets.Investment RequirementsThe policy specifies that the foreign investor would have to bring in at least USD 100million into the Indian entity as FDI .InfrastructureDeveloped supply chain and integrated IT management is absent in retail sector in Indiawhich is a huge bottleneck for smooth operations.Political RiskThe whole future of the FDI in multi brand retail policy depends on the dilly dallying ofIndian politicians.FIPB ClearanceDoR being a permanent member of the FIPB has been active in its role in clearance ofproposals as it is trying to curb the menace of Black Money.Middlemen LobbiesCurrently about 2/3rds of the total value share is grabbed by the middlemen in thecommodity trade business who will oppose FDI in retail as their interests will be hurt.APPROACH: 11Entry Point: Cash and Carry Partners100% FDI is allowed in wholesale trading. The wholesaler deals only with smaller retail-ers and not consumers (B2B).Franchise ModelIt is an easiest track to come in the Indian market. In franchising and commissionagents’ services, FDI is allowed with the approval of the RBI under FEMA.Battle ReadinessThe key is finding a partner which is reliable and who can also teach a trick or two aboutthe domestic market and the Indian consumer.Keeping A Close Watch On The Changing Political DynamicsConsidered as one of the most crucial elections for India’s reforms, the upcoming Lok-sabha elections in 2014 will have a significant impact on the FDI policy in retail.www.mlschase.com For Private Circulation Only
  3. 3. INDIA: Favorable Demographic Dividend With a population of 1.22 billion, India is one of the most unique and diverse countries in the world. Around 27.8% of the Indian population is urban and the rest 72.2% is rural. The rural population lives mostly in more than 600,000 vil- lages in India. But the most striking factor of India’s huge population is that around 50% of its citizens are below the age of 25. This makes India one of the youngest and fastest growing economies in the world.Exhibit 1.1: Majority of Indianpopulation live in rural areas. Exhibit 1.2: India has one of the lowest median age population compared to China. Moreover it is expected to be significantly lower than China in 2020. Around 81% of population in the age group of 15-25 is literate. India’s demo- graphic divide is encouraging. The country’s working-age population will in- crease by 117 mn over the next decade, compared with 4mn in China. Also in the next decade after 2020, India will add 98 mn to its working-age population, while China’s will contract by 51mn. The English speaking young India is a testimony to the booming IT services indus- try in the country. Over the last decade, IT has contributed about 45% of the in- cremental urban employment. IT exports rose from USD 2 bn in FY09 to USD 47 bn in FY10. By 2020, exports could rise threefold to USD 175 bn. Rank 2010 GDP 2020 (E) GDP 2030 (E) GDPTable 1.1: According to USD trn USD trn USD trnIMF estimates, India will 1 US 14.6 China 24.6 China 73.5have be the 3rd largestnation by GDP after 2 China 5.7 US 23.3 US 38.2China and US. India, 3 Japan 5.4 India 9.6 India 30.3doesnt even figure in thelist of top 10 nations by 4 Germany 3.3 Japan 6.3 Brazil 11.9GDP in 2010. 5 France 2.6 Germany 5 Japan 9.4 By 2030, India could be 8.4 times bigger than it is today. India’s growing middle class is driving a dynamic, domestically driven economy. This would make India an attractive market for companies to sell into. Consumer spending on durables is at a tipping point. The proportion of Indian households with refrigerators stands at 18%, compared with 48% in China. The ratio for washing machine own- ership is 18% in India versus 66% in China, and for television ownership it is 56% in India compared with 80% in China.www.mlschase.com 1 For Private Circulation Only
  4. 4. RETAIL: The Opportunity India is one of the top five retail markets in the world. The Indian retail industry is estimated to be around $ 450 bn and is expected to grow to $ 660 bn in 2015 and up to $ 1.3 trn by 2020. Retailing in India is one of the pillars of its economy and accounts for 19% of its GDP. The market is dominated by small retail family owned outlets which account for almost 95 % of the sales. Organized retail industry accounts for only 5% of total retail industry and these were present in large urban centers. Organized retail sales in India is too low, compared to 80% in the USA, 40% in Thailand, or 20% in China. However, its penetration is expected to reach 8.8% by FY15 according to report by Care Rat- ings. Indias retail and logistics industry employs about 40 million Indians (3.3% of Indian population).Exhibit 1.3: By keeping itsdoors shut to FDI in re-tail, organized retailnever really took off inIndia. A Reform That Took 15 Years > FDI permitted in cash & Union Cabinet approved carry, wholesale trading > 51% FDI in multi-brand retail > comes under the auto- Increasing the FDI limit in single matic route. brand retail to 100% > FDI in single brand retail However the implementation was permitted to the ex- was deferred, for evolving a tent of 51% broader consensus on the subject 1997 2007 2010 2011 2012 100% FDI being DIPP had put up permitted in a discussion pa- > DIPP notified the decision to cash & carry per proposing allow 100% FDI in Single wholesale trad- FDI in multi- brand ing under the brand retail Retail government > Union Cabinet approves the approval route FDI limit in Multi brand retail of 51%www.mlschase.com 2 For Private Circulation Only
  5. 5. RETAIL: The Opportunity Organized retail growth will be fuelled by spend on discretionary goods. Tradi- tional retail formats are fast getting replaced by modern organized retail formats due to growing retail space and changing consumer behavior. Education and media impact has led to a growing awareness and demands of the youth regard- ing the brand culture in the country. This coupled with the fact that purchasing power and consumerism are rising, will drive the retail market. But the most im- portant of all is the government stance on the FDI which will change the dynam- ics of the retail industry in India. INDIA: A Retailers Market During the last fifty years the population of India has grown two and half times, but Urban India has grown by nearly five times. By 2016, almost 35% of the In- dian population will be living in the urban centers. Urban areas will contribute ~65% to the GDP from the current 60%. For organized formats India serves as a land of opportunities with a brewing billion plus popula- tion supporting a superb high & middle income class segment. In metros consumers love pushing their trolleys down the long, straight aisles, that offer array of brands and fresh produce at similar or little higher rate than the local mom n pop store offerings down the lane. The organized retail supports different formats of outlets dependingExhibit 1.4: By 2016 the Urban Indian Population will be on catchment, spending power, proximity frommore than combined population of US, UK & Germany major residential and consumption clusters. Accelerated Consumption & Changing Habits India’s real annual per-capita income is expected to increase five-fold to about USD 5,500 by 2030. Rising incomes will create inflexion points for various prod- ucts and services as previously unattainable purchases become necessities. Both of these developments are likely to unleash a substantial shift in consumer spending and consumption patterns over the next two decades. 2011 2016 ETable 1.2: Consumerism Access to Internet (million people) 101 300is on the rise in India withrising disposable incomes Smart phone users (million) 48 178aided by solid economic Access to Digital TV (million people) 182 364growth Households with a 4 wheeler (million) 12 19 Laptops / Notebooks (million) 12 61 Indians traveling overseas (million people) 12 16 Engineers / MBAs graduating every year (million) 1 2www.mlschase.com 3 For Private Circulation Only
  6. 6. RETAIL: The Opportunity About two thirds of shoppers in India like their counterparts in China said that shopping is their favorite leisure activity unlike shoppers in mature markets like US and France where it is considered as a chore. Indians see shopping as family entertainment, spending hours together in a mall or a store. This has important implications for retailers. This is an opportunity to create ex- citing retail formats that help retain this attitude of shopping, resulting in higher footfalls and conversion. Retailers also need to be able to design their layout and operations to cope with many shoppers who are essentially browsing or window shopping for pleasure. It is critical not to drive these shoppers away as they will shortly become big spenders when their incomes rise. Types of Formats Working In IndiaExhibit 1.5: There are vari-ety of formats working inorganized retail in Indiacurrently, notably domi-nated by Supermarketsand Hypermarkets. Exhibit 1.6: The organized Food and Grocery retail market in India is estimated at US$ 9 Bn in 2011 and is expected to grow to US$ 34 Bn by 2016, @ CAGR of 30%. The organized Jewellery & Watches retail market in India is estimated at US$ 2.5 Bn in 2011 and is ex- pected to grow to US$ 7.5 Bn by 2016, @ CAGR of 25%. Organized Consumer Electronics & IT retail market in India is estimated at US$ 4 Bn in 2011 and is expected to grow to US$ 18 Bn by 2016, @ CAGR of 35%. There is huge scope for targeted retail in these seg- ments.www.mlschase.com 4 For Private Circulation Only
  7. 7. FDI POLICY: Single Brand Retail FDI in Single Brand implies that a retail store with foreign investment can only sell one brand. For example if Adidas were to obtain permission to retail its flag- ship brand in India, those retail outlets could only sell products under the Adidas brand. For Adidas to sell products under the Reebok brand which it owns, sepa- rate government permission is required and if permission granted it must sell Reebok products in separate retail outlets. However 100% FDI in Single brand is permitted only subject to Foreign Invest- ment Promotion Board (FIBB) conditions which are: • Only Single Brand Products are sold. Multi brand goods are not allowed even if produced by the same manufacturer. • Products are sold under the same brand internationally • Single brand products include those identified during manufacturing • Any additional product categories to be sold under single brand retail must first receive additional government approval Guidelines 1. The requirement that only the owner of the brand should be the foreign in- vestor has been eased. The FDI that is coming into an Indian entity engaged in single brand retailing can now be brought in by any non -resident entity having a valid agreement with the brand owner. 2. Domestic sourcing requirements: i. Entities with 51% FDI or less continue to be exempt from sourcing require- ments. For entities with more than 51% FDI, the present requirement of sourc- ing at least 30% of the inputs locally has been relaxed. ii. The revised rules also attempt to clarify the basis of computation of the sourc- ing requirement by specifying that 30% of the purchase value shall be sourced from India. iii. The compliance process in respect of the 30% domestic sourcing requirement has been clarified as under: a. The quantum of domestic sourcing will have to be self-certified by the Indian entity and subsequently checked by the Statutory Auditors. b. Entities have been now been given a window of 5 years to initially meet the domestic sourcing requirement. Accordingly, the sourcing requirement would have to be initially computed as 30% of the 5 year average annual purchase value beginning April 1 of the year in which the first tranche of FDI is received. c. Thereafter, the 30% domestic sourcing requirement would have to be com- plied on an annual basis. 3. There has been no relaxation in the norms governing B2C e-commerce seg- ment. It has been clarified that Indian companies with FDI, irrespective of the percentage thereof, cannot engage in Business-to-Consumers (B2C) ecommerce.www.mlschase.com 5 For Private Circulation Only
  8. 8. FDI POLICY: Multi Brand Retail FDI in Multi brand retail refers to selling multiple brands under one roof. Exam- ples would be a Wal-Mart or a Tesco and Pantaloons or Reliance Fresh back home. In September 2012 government of India has permitted 51% FDI in Multi brand retail with the approval from Foreign Investment Promotion Board or FIPB) subject to the following conditions: 1. The foreign investor would have to bring in at least USD 100 million (approximately INR 550 crores) into the Indian entity as FDI, although the time line for bringing in such FDI has not been specified. It can be presumed that such time line will have to be specified in the detailed plan to be provided to FIPB for approval by the proposed investor. 2. At least 50% of total FDI is required to be invested in back-end infrastructure within 3 years of the first tranche of FDI. Back-end infrastructure has been de- fined to include capital expenditure on all activities such as processing, manufac- turing, distribution, design improvement, packaging, storage, warehousing, qual- ity control, etc. but excludes expenditure on front end units, land cost, rentals, etc. 3. At least 30% of the value of procurement of manufactured / processed prod- ucts purchased shall be sourced from Indian ‘small industries’ having a maximum investment (valuation at the time of installation without depreciation) of USD 1 million in plant and machinery. The self-certification requirements and the time frame for meeting the sourcing requirements are similar to those provided un- der single brand retail. 4. Fresh agricultural produce is permitted to be sold unbranded. It has been clarified, however, that the Government will have the first right to procure agri- cultural products from farmers. 5. As in single brand retail, companies with FDI are not permitted to engage in multi brand retail B2C e-commerce. 6. The States have been given the discretion to agree or refuse to implement FDI in multi-brand retail. Certain States like Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand and the Un- ion Territory of Daman and Diu and Dadra and Nagar Haveli have already con- veyed their assent in implementing this policy. 7. Multi brand retail outlets can be set up by companies having FDI only in cities with a population of at least 10 lakh as per 2011 census. In states or union terri- tories which do not have cities with population of 10 lakh or more, such retail outlet may be set up at their discretion in any city, preferably the largest one. Such retail stores may cover an area of 10 kilometers around the municipal / urban agglomeration limits of such cities. 8. Applications to obtain approval are required to pass 2 levels – the Department of industrial Policy (DIPP) for ensuring compliance with the notified conditions and the Foreign Investment Promotion Board (FIPB) to accord the final approval.www.mlschase.com 6 For Private Circulation Only
  9. 9. CHALLENGES: Competition The retailing industry in India has a long way to go and to become a truly flour- ishing industry, retailing needs to cross various hurdles. The first challenge facing the organized retail sector is the competition from unorganized sector. Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized retailing with the dominance of small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets. The trading sector is also highly fragmented, with a large number of intermediar- ies who operate at a strictly local level and there is no ‘barrier to entry’, given the structure and scale of these operations. Retailers are witnessing an uphill task in terms of wooing consumers, despite offering big discounts. Additionally, organized retailers have been facing a diffi- cult time in attracting customers from traditional kirana stores, especially in the food and grocery segment. Some of the largest and most prominent Indian business houses such as Reli- ance, Godrej, RPG and the Future Group have all struggled in the Retail Industry in India. 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. Moreover, 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) Pantaloon Retail Over 2 ml sq ft of space spread over 35 cities with 65 stores & 21 factory outlets Shoppers Stop Over 3.21 million sq ft of retail space spread over 23 cities with 51 stores Spencers Retail Retail footage of close to 1 million sq ft across 45 cities with 200 stores Lifestyle Retail Approximately 15 lifestyle and eight Home Centre stores Bharti Retail 74 Easyday stores with plans to invest about $ 2.5 billion Reliance Retail 700 stores with a revenue of Rs 7,600 cr Aditya Birla ‘More’ 575 stores with approximate revenue of Rs 2,000 cr Tata Trent 59 Westside stores, 13 Starbazaar hypermarkets and 26 Landmark bookstores Table 1.3: Key Players In Indian Retail MarketCHALLENGES: Investment Requirements The policy specifies that the foreign investor would have to bring in at least USD 100 million into the Indian entity as FDI and at least 50% of total FDI is required to be invested in back-end infrastructure within 3 years of the first tranche of FDI. Back-end infrastructure has been defined to include capital expenditure on all activities such as processing, manufacturing, distribution, design improve- ment, packaging, storage, warehousing, quality control, etc. but excludes expen- diture on front end units, land cost, rentals, etc. Looking at the global financial crisis and high real estate prices in India, the investment requirements do look daunting at present.www.mlschase.com 7 For Private Circulation Only
  10. 10. CHALLENGES: Infrastructure Developed supply chain and integrated IT management is absent in retail sector. This lack of adequate infrastructure facilities, lack of trained work force and low skill level for retailing management further makes the business quite complex. Also, the intrinsic complexity of retailing- rapid price changes, threat of product obsolescence, low margins, high cost of real estate and dissimilarity in consumer groups are the other challenges that the retail sector in India is facing. There has been a lack of investment in the logistics of the retail chain in India, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT., 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural pro- duce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the auto- matic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant. According to the census of 2011, there are only 51 cities in India with a popula- tion of more than 1 million. In urban settings, the real estate prices are very high and clustered locations is also an issue. The state of urban planning in India is such that there is as yet no ceiling on the size or number of retail outlets that may be started in a designated commercial zone. In Hyderabad, one catchment of the city already has over 10 hypermarkets, 6 convenience stores and hun- dreds of kirana stores fighting for a share of wallets of its newly affluent shop- pers.CHALLENGES: Political Risk The FDI policy has been brought in amidst heavy protests from most of opposition in the Indian Parliament. Such is the situation right now that the incumbent UPA govern- ments key ally the TMC withdrew its support from the Government after the policy was notified. The UPA government still has out- side support from both SP and TMC, but it hangs on delicate balance. The whole future of the FDI in multi brand retail policy de- pends on the dilly dallying of Indian politi- cians. This doesnt instill confidence in Exhibit 1.7: The delicate political bal- Global Retailers who are looking to invest ance of the Indian Government millions of dollars in India.www.mlschase.com 8 For Private Circulation Only
  11. 11. CHALLENGES: FIPB Clearance Foreign Investment Promotion Board (FIPB) is an inter-ministerial body which examines and discusses proposals for foreign investments in the country for sec- tors with caps, sources and instruments that require approval under the extant FDI Policy. The Finance Minister considers the recommendations of the FIPB on proposals for foreign investment up to Rs 1200 crore. Proposals involving foreign investment of more than Rs 1200 crore require the approval of the CCEA. FIPB is mandated to play an important role in the administration and implemen- tation of the FDI policy. The composition of the Board is as mentioned below: • Secretary, Department of Economic Affairs, Ministry of Finance (Chairman) • Secretary, Department of Industrial Policy & Promotion • Secretary, Department of Commerce • Secretary, Economic Relations, Ministry of External Affairs • Secretary, Ministry of Overseas Indian Affairs The Board has discretion to co-opt other secretaries to Government of India and other officers of Financial Institutions. The Secretary, Ministry of Small, Medium & Micro Enterprises and Secretary, Department of Revenue has been co-opted on the Board. Coun- Proce- Time Cost (% of in- Starting a Business Dealing with Con- Getting Electricity try dures (days) come per capita) struction Permits Time Cost (% of Time Cost (% of Time Cost (% ofBrazil 13 119 5.4 (days) income (days) income (days) incomeChina 14 38 3.5 per capita) per capita) per capita)India 12 29 46.8 29 46.8 227 1,631.40 67 216.2Russia 9 30 2 Table 1.4: Due to various procedures, the time taken to do businessUK 6 13 0.7 in India is longer than the developed nations. Also the cost of doing business is more than other BRIC nations.US 6 6 1.4 At the time of clearing the proposals the board considers the views and com- ments from the administrative ministry concerned for the sector, Department of Revenue (DoR) & other concerned departments. DoR being a permanent mem- ber of the board has been active in its role in clearance of proposals as it is trying to curb the menace of Black Money. The DoR is scrutinizing the proposals from various angles to avoid any loss of revenue to the exchequer and its objections to the proposals are mainly on the grounds of: • Absence of Identity of Foreign Investors and country of origin of the foreign investment • Investment by Shell Companies with no incomes • Multilayered Structures/ Treaty Abuse • Source of Funds/Round Tripping • Tax Avoidance The DoR’s concerns in the recent past have been more on the usage of treaties by the companies to reduce their tax exposures.www.mlschase.com 9 For Private Circulation Only
  12. 12. CHALLENGES: Middlemen Lobbies India is a land of approximately 600 million farmers catering to a billion plus con- sumers. Majority of them are challenged with small land holdings and low pro- ductivity. Apart from internal constraints the farmer also deals with mammoth shareholders like middleman and traders. Supply chain Stakeholder Price Breakup/ % Share Gross Margin kg % Farmer 27 28-30% Transporter 5 5-8% 12 – 15% Commission Agent 7 8-10% 18 – 20% Aggregator cum Wholesaler 11 12-13% 20 – 25% Transporter 5 5-8% 8 – 10% Distributor 16 18-20% 20 – 25% Retailer 20 20-25% 20 – 25% 90 100% Table 1.5: A typical example of the Himachal Apple illustrates that the farmer only fetches 30% in place of 70-75% (excluding transport cost) because of absence of direct buyers and presence of mediators. Currently about two thirds of the total value share is grabbed by the middlemen and traders in the commodity trade business. Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, gov- erned by state APMC Acts, have developed a monopolistic and non-transparent character. There is a big question mark on the efficacy of the public procure- ment and PDS setup and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate custom- ers paying a premium for shortages and a charge for wastages. Current state of supply chain of perishables adds up to the end price of com- modities. Lack of proper transport and storage facilities increases the wastage level and lowers the availability of produce. Augmentation of international re- tailers operations will encourage farmers to utilize better storage and transpor- tation facilities. In a huge geography of 32 lakh plus square-kms there are many admirable exotic commodities which are restricted with local markets. The up- graded supply chain interventions will improvise the reach of these commodities and the producers will fetch better returns. For example, Walmart has introduced “Direct Farm Project” at Haider Nagar in Punjab, where 110 farmers have been connected with Bharti Walmart for sourc- ing fresh vegetables directly. But intermediaries and mandi system will be evicted, directly benefiting the farmers and producers. Hence foreign players can expect to face stiff opposition and lobbying from them.www.mlschase.com 10 For Private Circulation Only
  13. 13. APPROACH: Entry Point - Cash & Carry Partners 100% FDI is allowed in wholesale trading which involves building of a large distri- bution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not consumers (B2B). Metro AG of Germany was the first significant global player to enter India through this route. A major case study of global retailers entering India through this route: In August 2008, UK-based Tesco announced its solo foray into the cash-and-carry segment of Indian retail sector along with an exclusive franchise agreement with Trent Limited, a Tata Group company which operates hypermarket chain Star Bazaar and lifestyle departmental stores under the brand name Westside. Trent has access to Tesco’s supply chain, IT systems and inventory and infrastructure management systems for a nominal fee. The first Tesco branded warehouse store opened in Mumbai followed by Delhi and Bangalore and use a hub-and-spoke model for distribution. Tesco built cash- and-carry warehouses which will supply to Tata stores and items in bulk to small traders like kirana stores (mom and pop stores) and institutional customers, like hostels, restaurants, and caterers. FOREIGN PARTNER INDIAN PARTNER C&C Partnership BACK END FRONT END (Supplies, IP, etc) (Retail Outlets)APPROACH: Franchise Model It is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food chains across the world. Apart from quick food chains identical to Pizza Hut, players such as Lacoste, Nike, Marks & Spencer etc have entered Indian marketplace by this route. Some foreign brands give exclusive licenses and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd. The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, there- fore, allowed to do retail. These companies have been authorized to sell prod- ucts to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive li- censing agreement with Sierra Enterprises but now has a wholly owned subsidi- ary, Nike India Private Limited.www.mlschase.com 11 For Private Circulation Only
  14. 14. APPROACH: Battle Readiness There isnt an opportunity to make quick profits in the Indian retail industry. The scale and the size of the industry is too huge to entice foreign retailers who dont have deep pockets. However, there is huge opportunity for those who are willing to be patient and earn dividends from long term investment in the Indian retail industry. For those companies which choose to adopt the route of 51% partnership must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian con- sumer. An arrangement in the short to medium term may work wonders. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own sub- sidiary in the ‘same field’ without the first partner’s consent if the joint venture agreement does not provide for a ‘conflict of interest’ clause. The foreign players who are willing to learn from their mistakes in other emerg- ing markets and early experiences in India, go through a careful partner selec- tion process, understand the political / legal / external hurdles and invest with a realistic time horizon truly have an unique opportunity to create win-win situa- tions for all stakeholders. There doesnt seem any first mover advantage. Foreign retailers should be look- ing for strong partnerships and JV’s with Indian companies who are involved in the logistics of the Retail Industry.But Keep A Close Watch On The Changing Political Dynamics Considered as one of the most crucial elections for India’s reforms, the upcom- ing Loksabha elections in 2014 will have a significant impact on the FDI policy in retail. The policy will continue if the UPA will come back to power. However do expect some changes in the policy if NDA comes to power. NDA has opposed to the policy and may enforce some changes in it if voted to the parliament. The lease likely probability, but a scary one, is if the Third front is voted to parlia- ment. Then the whole policy will be scrapped and reforms agenda will be pushed to the backburner. Scenarios Impact on Current FDI Policy If the next PM is from BJP Neutral If the next PM is from NDA - Non BJP Negative If the next PM is from UPA Positive If the next PM is from Third Front Adverse Table 1.5: In the run up to the Loksabha elections of 2014, there are many scenarios that can be taken into consideration.www.mlschase.com 12 For Private Circulation Only
  15. 15. OUR OFFICES:LONDON: ST. ALBANS:7 Swallow Place 45 Grosvenor RoadMayfair St AlbansLondon HertfordshireW1B 2AG AL1 3AWT: +44 (0)20 7478 9010 T: +44 (0)1727 832830E: info@mlschase.com E: info@mlschase.comMUMBAI:MLS Vani & Associates410 Yusuf BuildingVeer Naiman RoadFortMumbai 400 001IndiaT:+ 91 22 22875333E: info@mlsvani.comDISCLAIMER:XXXXXXXwww.mlschase.com For Private Circulation Only