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Foreign Direct Investment inRetail

February 23, 2004


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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations


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Agenda


Indian retail

The change factor


Why FDI ?

How FDI ?


Recommendations


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Retailing

Worlds largest private industry

US$ 6.6 trillion sales annually

Indian retailing Largest employer after agriculture - 8%* of

population

Highest outlet density in world

Around 12 mn outlets

Still evolving as an industryLong way to go

An overview

Retailing: An overview

*www.etretailbiz.com/dec2002


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Wal-Mart Topmost global Fortune 500 company(3

Consecutive Years)

Annual Sales of over US$ 250 bn

Indias two largest retail player turnover

around US$ 158 mn (Bata) and US$ 102 mn(Shoppers Stop)

Fortune 100

9 Retailers

Carrefour, Ahold, Home Depot, Kroger,Metro, Kmart-Sears, Target, Albertsons

An overview

Retailing: An overview

*Fortune List of worlds top companies

**Eurom oni tor India Retail Survey


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Agenda


Indian retail

The change factor


Why FDI ?

How FDI ?


Recommendations


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Weekly Markets

Village FairsMelas

Convenience StoresMom andPop/Kiranas

PDS OutletsKhadi Stores

Cooperatives

Exclusive BrandOutletsHyper/Super MarketsDepartment StoresShopping Malls

Traditional/Pervasive Reach

GovernmentSupported

Historic/RuralReach

Modern Formats/International

Evolution of Indian retail

Source ofEntertainment

NeighborhoodStores/Convenience

Availability/ LowCosts /

Distribution

ShoppingExperience/Efficiency


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Informal retailing Sector Typically small retailers.

Evasion of taxes

Difficulty in enforcing tax collectionmechanisms

No monitoring of labor laws

Formal Retailing Sector

Typically large retailers

Greater enforcement of taxation

mechanisms High level of labor usage monitoring

Indian retail

Evolution of Indian retail


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Corporate Houses

Tatas: Tata Trent

RPG group: Food World, Health andGlow, etc

ITC: Wills Life Style

Rahejas(ShoppersStop),Hiranandani(Haiko), DLF(DT cinemas) etc.

Dedicated brand outlets

Nike, Reebok, Zodiac etc

Multi-brand outlets

Vijay Sales, Viveks etc Manufacturers/ Exporters

Pantaloons, Bata, Weekender

Indian retail

Categories of Indian retail


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Modern Format retailers Supermarkets (Foodworld)

Hypermarkets (Big Bazaar)

Department Stores (S Stop)

Specialty Chains (Ikea)

Company Owned Company Operated

Traditional Format Retailers

Kiranas: Traditional Mom and Pop Stores

Kiosks

Street Markets Exclusive /Multiple Brand Outlets

Indian retail

Classifying Indian retail


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Hypermarket

Big Bazaar Giants

Shoprite

Star

Department store Lifestyle

Pantaloons Piramyds

Shoppers Stop

Trent

Entertainment Fame Adlabs

Fun Republic

Inox

PVR

Indianretailers

Large Indian retailers


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Agenda


Indian retail

The change factor


Why FDI ?

How FDI ?


Recommendations


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Greater per capita income Increase in disposable income of middle

class households

20.9%* growth in real disposable income in99-03.

Growing high and middle income population

Growing at a pace of over 10%* per annumover last decade

Affordability growth

Falling interest rates

Easier consumer credit

Greater variety and quality at all pricepoints

Indianconsumer

The changing Indian consumer

From Euromonitor Retail Survey


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The urban consumer

Getting exposed to international lifestyles

Inclined to acquiring asset

More discerning and demanding than ever

No longer need-based shopping

Shopping is a family experience

Changing Mindset

Increasing tendency to spend

Post Liberalization children coming of age

100 mn 17-21 year olds*. Tend to spendfreely.

Greater levels of education

Indianconsumer

The changing Indian consumer

*Data from NCAER


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Market size

Current market size is roughly US$ 286 bn*

96% of the 12 Million stores are less than 500Sq. ft.

Forecast Growth rate for the retailingindustry is roughly 8.3% for 2003-2008

Sales from large format stores would rise by24-49%**

Formal and modern format retailing would

enjoy rapid growth

Anticipatedgrowth

Anticipated growth

*From ICICI Retail Repo rt

**From Euromoni tor Retai l Survey


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Low domestic competition

Because of fragmented nature of industry

Lack of exposure to global best practices

Low entry barriers for unorganized retailing

Moderate entry barriers for organized

retailing

Wholesale system under-invested leading to20-40% wastage

Non level playing field issues Wide differences in treatment of small and

large retailers

Industrydynamics

Industry dynamics


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Highly distorted real estate market Pro-tenant laws

Zoning laws

Zoning laws also vary from state to state

Non-availability of government land, and

fragmented private holdings makes itdifficult for retailers to acquire land

Government is largest property owner incountry

Urban Land Ceiling act is archaic

Stamp Duty and registration charges athigh levels. Also vary from state to state

RE issues

Real estate issues


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Growth determining factors

Government Policy

Infrastructure development

GDP growth Employment generation and job creation

In several new sunrise industries

Implies greater purchasing power

Growthfactors

Growth factors


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India ranked 5th in the Global A.T KearneyRetail Development Index

Second only to China in Asia

Least saturated of all global marketsstudied

The least competitive of all global marketsstudied

Implies lower barriers of entry for globalplayers

Considering tremendous market size,excellent potential for foreign players

India ranked 3rd in the Global A T Kearney FDIConfidence Index in 2004

Improved from Rank 6 in Year 2003

AdvantageIndia

The Indian advantage


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Agenda


Indian retail

The change factor

FDI in Indian retailingWhy FDI ?

How FDI ?


Recommendations


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Current Indian FDI Regime FDI not permitted in retail trade sector,

except in:

Private labels

Hi-Tech items / items requiringspecialized after sales service

Medical and diagnostic items

Items sourced from the Indian smallsector (manufactured with technologyprovided by the foreign collaborator)

For 2 year test marketing (simultaneous

commencement of investment inmanufacturing facility required)

FDI in Retailnot permitted



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Metro Group of Germany

Cash-and-carry wholesale trading Proposal faced strong opposition

Entities established prior to 1997

Allowed to continue with their existing

foreign equity components. No FDI restrictions in the retail sector pre-

1997

Foodworld

51:49 JV between RPG and Dairy Farm

International, Leading food retailer in India now

Mc Donalds

Current FDI



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Franchise International company gives name and

technology to local partner. Gets royalty inreturn

In case master franchise is appointed forregion or country, he has right to appoint

local franchiseesNike, Pizza Hut, Tommy Hilfiger, Marksand Spencer, Mango

Manufacturing

Company sets up Indian arm for production

Bata India. It also has right to retail inIndia

How they arepresent

International retailers in India: Strategies


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Distribution

International company sets up localdistribution office

Supply products to Indian retailers to sell

Also set up franchised outlets for brand

Swarovski, Hugo Boss

Wholesale trading

Cash and Carry operations

100% FDI permitted

Metro Cash n Carry

How they arepresent

International retailers in India: Strategies


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Agenda


Indian retail


Why FDI ?How FDI ?

Incentives for FDI


Recommendations


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Improve competition

Develop the market

Greater level of exports due to increasedsourcing by major players

Sourcing by Wal-Mart from China improvedmultifold after FDI permitted in China

Similar increase in sourcing observed forMetro in India

Provides access to global markets forIndian producers

Benefits ofFDI

Why FDI?


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Investment in technology Cold storage chains solve the perennial problem

of wastage

Greater investment in the food processing sectortechnology

Better operations in production cycle and

distribution Better lifestyle

Greater level of wages paid by internationalplayers usually

More product variety

Newer product categories

Economies of scale to help lower consumer price

Increased purchasing capacity of consumers

Benefits ofFDI

Why FDI?


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Manpower and skill development Through retail training and

Greater managerial talent inflow from othercountries

Tourism Development A strong retailing sector boosts tourism as seen

from the experience of Singapore and Dubai

Investment in whole supply chain Improved product basket from India for exports

Long term benefits Up-gradation of agriculture

Development of efficient small and medium sizeindustries

Benefits ofFDI

Why FDI?


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Benefits to the government

Greater Per

Capita Income

Greater Consumer

Spending due to

economic boom

Increasing

Tax Paying

Population

Greater

Sourcing

From India

Reduced Tax

Evasion

GDP Growth

Increased Tax

Revenues

Greater

Exports

Employ

mentBenefits

to Govt.


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Increase employment levels

FDI would result in market growth andexpansion

Employment generated at various levels Increased consumer demand impliesemployment generation across the value chain

Does not need very high skill sets Needs high school graduates and othersimilar skill levels

Currently this is a majorly unemployeddemographic group

Boom in employment Similar to job generation in ITES industry

On a much larger scale

But new jobs comparatively lower down thevalue chain

Benefits togovt.

Benefits to the government


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Agenda


Indian retail

The change factor


How FDI ?


Recommendations


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FDI should be allowed in stages

Initial stages: 26% FDI

Establishment Phase: 49% FDI

Mature Phase: 100% FDI

FDI policy

No incentives needed to attract FDI

Market size and potential are sufficientinducers

No need for costly tax breaks, import dutyexemptions, land and power subsidies, andother enticements

How FDI ?

How FDI ?

2 yrs

2 yrs

2 yrs


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Agenda


Indian retail

The change factor

FDI in Indian retailingWhy and why not FDI ?

How FDI ?

Case study : Chinese retailing

Recommendations


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FDI permitted in 1992. 40 foreign retailers havesecured approval

Retail sales have [email protected]% CAGRsince FDI was permitted

FDI initially restricted to 6 major cities(including Beijing, Shanghai and Guangzhou)

and SEZs

Foreign ownership initially restricted to 49%

US$ 22 bn of FDI attracted, 3.6% of total FDI

In 2003, FDI in wholesale and retail was US$1.1 bn (Around 30% of our total FDI in 2003)

Current restrictions on FDI will be phased outover 5 years as condition of WTO entry

Chineseretailing



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7

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0

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5

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0

9

1

9

2

9

3

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4

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5

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6

9

7

9

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9

9

0

0

0

1

0

2

75

150

225

300

375

FDI in retail allowedUS$

bn

Total wholesale and retail trade

Retail sales grew @ 19.6% CAGR for the next 4 years after theintroduction of FDI in 1992

Years


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China: The effect of FDI

Modern formats have grown after FDI

But so have traditional players

Type No. of stores in

1996

No. of stores in

2001Traditional 1,920,604 2,565,028

Supermarkets 13,079 152,194

Convenience 18,091

Hypermarkets 593


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Employment in retailing is increasing

Source : China Statist ical Yearbook 2001

Employment in Retailing

0

10

20

30

40

50

60

90 91 92 93 94 95 96 97 98 99 00 01

Year

Employmentin

Reta

iland

wholes

ale(Mn)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

%

ofTo

talLabor

fo

rce

Employment %


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Walmart

Entered Chinese market in 1996

Has 43 stores in 19 cities as on date Had sales of US$ 704 mn in 2003

Has employed more than 20,000 people Has paid taxes of US$ 111 mn in total*

Carrefour

Has 54 stores as on date

Had sales of US$ 1.6 bn in 2003*

Chineseretailing


Source : company w ebsi tes


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Strong evidence in favor of FDI

FDI improves the entire size of the industry

Retailing in China has grown at acompound rate of 15% per annum afterFDI inflow

Employment growth

Evolution of modern formats

Local players can survive and even beatforeign competition

Need for a strong retailing industry inIndia

Scale is the key to success for localretailers

Lessons fromChina

Lessons from China


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Agenda


Indian retail

The change factor


How FDI ?


Recommendations


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Grant industry status to retail

Permit FDI in Retail in phases

Invest in supply chain infrastructure

Ease distribution infrastructure creation,octroi

Ensure single window clearance for retailchains

Organize market for real estate

Ensure proper rent laws

Enforce zoning laws and city development plan

Increase land supply

Ensure flexibility of labor laws

Recommendations

Recommendations


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THANK YOU

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