FDI IN Retail

India's 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 haven't 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.

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INDEX Page
INDIA: Favorable Demographic Dividend 1
India’s growing middle class is driving a dynamic, domestically driven economy. This
would make India an attractive market for companies to sell into.
RETAIL: The Opportunity 2
India 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 5
FDI POLICY: Multi Brand Retail 6
CHALLENGES: 7
Competition
The Indian retail sector is swarmed by the unorganized retailing with the dominance of
small and medium enterprises in contradiction to a few giant corporate retailing outlets.
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 .
Infrastructure
Developed supply chain and integrated IT management is absent in retail sector in India
which is a huge bottleneck for smooth operations.
Political Risk
The whole future of the FDI in multi brand retail policy depends on the dilly dallying of
Indian politicians.
FIPB Clearance
DoR being a permanent member of the FIPB has been active in its role in clearance of
proposals as it is trying to curb the menace of Black Money.
Middlemen Lobbies
Currently about 2/3rds of the total value share is grabbed by the middlemen in the
commodity trade business who will oppose FDI in retail as their interests will be hurt.
APPROACH: 11
Entry Point: Cash and Carry Partners
100% FDI is allowed in wholesale trading. The wholesaler deals only with smaller retail-
ers and not consumers (B2B).
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 RBI under FEMA.
Battle Readiness
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 consumer.
Keeping A Close Watch On The Changing Political Dynamics
Considered 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.


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 Indian
population 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) GDP
Table 1.1: According to USD trn USD trn USD trn
IMF estimates, India will 1 US 14.6 China 24.6 China 73.5
have be the 3rd largest
nation by GDP after 2 China 5.7 US 23.3 US 38.2
China and US. India,
3 Japan 5.4 India 9.6 India 30.3
doesn't even figure in the
list of top 10 nations by 4 Germany 3.3 Japan 6.3 Brazil 11.9
GDP 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.

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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. India's retail and logistics industry employs about 40 million Indians (3.3%
of Indian population).

Exhibit 1.3: By keeping its
doors shut to FDI in re-
tail, organized retail
never really took off in
India.

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%


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 depending
Exhibit 1.4: By 2016 the Urban Indian Population will be on catchment, spending power, proximity from
more 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 E
Table 1.2: Consumerism Access to Internet (million people) 101 300
is on the rise in India with
rising disposable incomes Smart phone users (million) 48 178
aided by solid economic
Access to Digital TV (million people) 182 364
growth
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 2

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 India
Exhibit 1.5: There are vari-
ety of formats working in
organized retail in India
currently, notably domi-
nated by Supermarkets
and 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.


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.


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.


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 Market
CHALLENGES: 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.

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 doesn't 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.


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 (% of
Brazil 13 119 5.4 (days) income (days) income (days) income
China 14 38 3.5 per capita) per capita) per capita)

India 12 29 46.8
29 46.8 227 1,631.40 67 216.2
Russia 9 30 2
Table 1.4: Due to various procedures, the time taken to do business
UK 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.


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.


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.

APPROACH: Battle Readiness
There isn't 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
don't 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 doesn't 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.


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