FDI in Multi – Brand Retail in India

7/30/2019 FDI in Multi Brand Retail in India

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FDI in Multi

Brand Retail inIndia


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Introduction to FDI

Timeline of FDI implementation in India

Key facts

Riders by Govt.

Challenges faced by Foreign Multi brand retailers

Effect of FDI on various stakeholders

Political and financial aspects

SWOT analysis

Wal-Mart, IKEA and TESCO

China A comparison

Recommendations

Agenda


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Foreign Direct Investment is a direct investment by a

commercial venture in another country

It is one of the major source of foreign reserve for adeveloping economy like India

It may enter in the country either through automatic

route or through the Foreign Investment Promotion Board(FIPB)

Introduction


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1997100% FDI permitted in cash & carry wholesaletrading under the government approval route

2006FDI in single brand retail permitted to the extent of51%.

2010DIPP put up a discussion proposing FDI in multibrand retail

2011Union cabinet approves 51% FDI in multi brandretail and increased FDI in single brand retail to 100%,

but the implementation was deferred due to lack onconsensus.

2012In January DIPP approves 100% FDI in singlebrand retail and in September it approved 51% FDI inmulti brand retail.

Timeline


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Only 8% of the retail sector in India is organized. There is

a huge potential for growth of organized sector

A population of more than 500 million under the age of

25 means a huge potential market A rural population of 700 million is a lucrative market

for agriculture based industries

Increasingly aspirational middle class of 300 million

individuals Increasing education is increasing brand consciousness

India a lucrative market for FDI


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Sector FDI allowed

Telecom 100%

Single brand retail 100%

Multi brand retail 51%

Aviation 49%

Insurance 49%

Defense 26%

Key Facts about FDI


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Multi brand retailers allowed to invest in states in which

no city has more than 1 million population

State government approval required for allowing FDI

30% sourcing for SMEs mandatory (only on firstengagement)

Minimum of 100 million dollars investment is necessary

of which 50% is to be invested in back end infrastructure

Riders by Government - Overview


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Help in controlling fiscal deficit

Will bring much needed investment in agricultural

infrastructure

Employment generation Supply chain improvement

Man power and skill development

Growth of market size on back of greater investment

Direct procurement for farmers Economies of scale will lead to reduction of prices

FDI will spur competition among local industries leading

to better productivity

Arguments for FDI in Retail


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Unorganized local retailers will not be able to compete

against the global players

Fear of predatory pricing leading to monopoly

Very little investment required for retail thus leading tolow working capital and greater profits being taken back

to foreign countries

Lead to job displacement due to removal of intermediaries

There are better alternatives to reducing fiscal deficit

Arguments against FDI in Retail


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Minimum sourcing of 30% from small and medium

industries

Approval of state governments required

Lack of clarity on policies Approaching 2014 election could change the whole

scenario for retailers

Skepticism due to Vodafone tax row and scrapping of

licenses in 2G-scam

Challenges Faced by Foreign Retailers


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A Political Angle


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Strengths

Retail is a $450bn industry in India

Young and dynamic manpower

Highest shop density in the world

High growth in retail and wholesale trade

Presence of big industrial houses

Weaknesses

High capital investment required in the retail

sector

Lack of trained and educated workforce

High prices as compared to kirana stores

Will mainly cater to high-end consumers in

metro cities.

30% sourcing from local manufacturers willaffect quality of procured goods and will make

local manufacturers less competent.

Opportunities

High employment generation in the future

Will enhance financial conditions of

the farmers Encourage foreign capital inflows

Improve logistics and infrastructure

Quality control and control over leakages

and wastages

Control the fiscal deficit

Help build back-end infrastructure

Will control inflation

Threats

Effect on small retailers

Long gestation period Foreign retailers will

take a while to adapt to Indian markets States not buying in so efficiencies may not be

achieved

Will need approval of state governments

SWOT Analysis


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American company

Collaboration with Bharti

Current head of India Operations- Ramnik Narsey

Bribery allegations in USA in May 2012 Rumours of Bharti pull-out

Waiting for 2014 general elections

Miss first movers advantage

Problem with no e-commerce clause

Wal-Mart


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Swedish company

Single brand retail store

Current head of India operations- Juvencio Maetzu

100% FDI in single brand retail store now Investing ` 10500 crore in India

Used to source from India

Want to establish only Stand- alone stores for now

Willing to cater to specific needs of Indians

IKEA


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British Company

Talks with Tata for collaboration

Want to invest $ 596 million for back-end operations in

India Already established in China, South Korea, Malaysia and

Thailand

Want to establish in India

TESCO


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There are many similarities between the introduction of

FDI in retail in China and India. The timelines vary but we

can learn a lot from China as it has the same population as

ours and same demographics to a large extent.

China allowed FDI in the year 1992. It introduced FDI in

phased manner just as India is doing at present. China

allowed FDI with some restrictions which are as follows

It was restricted to six major cities and SEZs

Foreign ownership initially restricted to 49%

A comparison to Chinas retail industry


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Effect of opening up of sector

40 foreign retailers have secured approval since 1992

$ 22 billion of FDI attracted, 3.6% of total FDI.

Employment in retailing has grown at 6% p.a. since 1992 to 53

million

Retail sales have [email protected]% CAGR since FDI was permitted.

In 2003, FDI in wholesale and retail was US$ 1.1 Billion(Around

30% of our total FDI in 2003)

Some well-known foreign retail corporations include Nike, Wal-Mart,

Carrefour, 7- Eleven, and Giordano. These retailers, amongst others,

account for some of the 10 percent of total merchandise.

Since 1992 FDI has improved the quality of experience, choice and

prices for the Chinese shoppers.

There was also considerable increase in traditional stores,

hypermarkets, super markets, convenience


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What made China achieve this?

First, it is huge. With a population in excess of 1.3 billion

people, even a small share of middle class consumers is bound

to be a lot of people

China has recently joined the WTO and is thus obligated to

make changes to the consumer distribution system that will

benefit efficient retailers

A potentially vast domestic market and an environment from

which it is easy to export. As the population was huge, the

foreign retailers also have enough manpower to employ Thus, for the china's success in retailing has come through FDI

and it consists of lot of factors as seen above


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Similarities between India and China

Pricing is key - Differences between urban and rural consumers

are significant in both China and India. Most foreign entrants

wrongly assume that anything Western will sell. The initial

fascination for Western brands goes off once the discerning

consumer finds local products of the same quality at affordableprices. Getting pricing is key

Markets within a market - India, with its distinctive regions,

diverse religions, languages and cultures, is as diverse as many

sub-markets within a market like China. Retail formats thathave worked in South India have not received the same

response in the other regions. It has been no different in China

Size, population, and middle-income people


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Recommendations

Regulate modern retailReduce and control the speed of

spread of retail stores. Put a ceiling on the number and size of

retail outlets in a designated commercial zone

Help farmers become competitive suppliers to Supermarkets

Regulatory framework to avoid monopolistic practices

Competition Commission of India would need to play a pro-

active role


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FDI in Multi – Brand Retail in India

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