Report on Impact of FDI in Retail in India

12/2/2013

Akshay Seth

FOREIGN PARTICIPATION IN INDIAN

RETAILSCAPE.. REVOLUTION OR EVOLUTION

ANALYSIS FROM A TECHNOCRATIC PERSPECTIVE

Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective Page 2 of 56

Table of Contents

Sno. Description Pages

1. Chapter 1 – About the Report 4

1.1. Abstract

1.2. Methodology

2. Chapter 2 – Indian Retail Sector 5 – 16

2.1. Introduction

2.2. Sector Overview

2.3. Growth and Evolution of Indian Retail Sector

3. Chapter 3 – FDI policy in Retail 17 – 24

3.1. Understanding the term FDI

3.2. Evolution of FDI policy in Retail

3.3. Structure of FDI policy in Retail

3.4. FDI in Single Brand Retail Trade (SBRT)

3.5. FDI in Multi Brand Retail Trade (MBRT)

3.6. FDI Policy in E – commerce

3.7. Acceptance of FDI Policy by Indian States

4. Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other Countries 24 – 27

4.1. China

4.2. Thailand

4.3. Indonesia

4.4. Brazil

4.5. Russia

4.6. Mexico

5. Chapter 5 – Impact of FDI in Retail in China 27 – 30

5.1. Impact on Farmers

5.2. Impact on Organized Retail

5.3. Impact on Traditional Retail

5.4. Impact on Supply Chain

5.5. Impact on Consumers


6. Chapter 6 – Critical Analysis of Impact of FDI in Retail in India 31 – 41


6.2. Impact on Traditional Markets



6.5. Impact on Employment

6.6. Impact on Inflation

6.7. Impact on Government Revenue from Taxes

7. Chapter 7 – SME Sector‘s viewpoint on Impact of FDI policy in Retail 41 – 45

7.1. Impact on Sales

7.2. Impact on Size of Industry, Business / Capacity addition

7.3. Impact on New Orders / Contracts

7.4. Impact on Qualitative improvements & Branding of products

7.5. Impact on Supply Chain efficiencies


8. Chapter 8 – Analysis of current entry structure in line with FDI Policy regulations 45 – 52

8.1. Entry structure for Foreign Retailers

8.2. FDI policy regulations for Single Brand Retail Trade (SBRT) – an analysis

8.3. FDI policy regulations for Multi Brand Retail Trade (MBRT) – an analysis

8.4. Impact of regulation: Minimum investment of USD 100 Mn

8.5. Impact of regulation: 50% of FDI to be invested in backend infrastructure in 3 years

8.6. Impact of regulation: 30% sourcing from small industries

8.7. Impact of regulation: Only cities with population more than 1 Million

8.8. Impact of regulation: Approval from State Government required

8.9. Impact of regulation: E – Commerce not permissible

9. Chapter 9 – Key Challenges 52 – 53

10. Chapter 10 – SWOT Analysis 54

11. Chapter 11 – Conclusion 55 – 56

12. Chapter 12 – References 56


1. Chapter 1 – About the Report

1.1. Abstract

India is one of the top five Retail markets in the world in terms of economic value, and the fastest

growing market in the world with a catchment of over 1.2 billion people.

Retail sector in India is considered to be the sunrise sector with a huge growth potential. Estimated to be

between USD 450 – 550 Billion in 2012, the Retail Sector is expected to grow to USD 750 – 850 Billion

by 2015. In its present state, the Retail sector accounts for nearly 14 – 15% of the country‘s GDP.

However, in spite of its immense contribution to the economy, retailing continues to be the least evolved

industries and the growth of organized retailing in India has been much slower as compared to rest of the

world.

This situation of the retail sector, despite the on – going wave of continuous liberalization and

globalization can be blamed on weak policy framework and the absence of an encouraging and well

structured FDI policy in the sector.

In the above context, this research paper attempts to analyze the strategic impact of the influx of the

Foreign Direct Investment (FDI) Policy introduced in its most current format in September 2012, for the

Indian retail industry.

This paper broadly covers the principal policy decisions of the FDI policy in Retail, and analyses the

effects of these decisions on the retail sector. This paper also attempts to broadly study the impact of the

FDI policy on major stakeholders, covering impact on farmers, traditional retail, consumers, supply chain,

employment, inflation, and Government revenue in form of taxes.

This paper attempts to draw out the benefits of allowing FDI in retail, and broad recommendations most

suited to our country‘s diverse and dispersed retail market.

1.2. Methodology

Reliance has been placed on the information contained in journals, reports, newspapers, research papers,

online databases, etc. No information has been collected directly from primary sources. The research

paper is based on secondary data / resources available for review.


2. Chapter 2 – Indian Retail Sector

2.1. Introduction

Indian retail industry is one of major pillars of the Indian Economy contributing nearly 14% – 15% to the

country‘s GDP.

However, as of date, the Indian Retail scenario has been dominated by owner manned small shops, mom

& pop stores, small ―kirana‖ grocery / daily needs stores, etc. In 2010, larger format convenience

stores and supermarkets accounted for about 4% of the industry, and these were present only in large

urban centers. The sector in its present form is highly unorganized, with organized retail accounting for a

meager 8% of the total sector.

Until 2012, the Indian Central Government denied Foreign Direct Investment (FDI) in multi-brand retail,

forbidding foreign groups from any ownership in supermarkets, convenience stores or other retail outlets.

Even single – brand retail was limited to 51% ownership and a bureaucratic process. In September 2012,

the Government of India passed a Foreign Direct Investment policy which now allows foreign retailers to

own up to 51% in multi – brand retail and 100% in single – brand retail.

With the introduction of the FDI policy, the organized retail sector in India, is estimated to grow at a

staggering growth rate of 30% by 2015, which is twice as fast as the forecasted growth rate of the overall

retail sector, which is expected to grow at a rate of 16%. It is hence anticipated, that these stores will now

have full access to over 200 million urban consumers in India, approximately 47% of which are below the

age of 30 and have high levels of consumption.

2.2. Sector Overview

According to the India Retail Report 2013, the Indian Retail market is estimated to exceed US$ 750

billion by 2015, presenting a strong potential for foreign retailers planning to enter India.

In its present state the sector stays predominantly unorganized, with organized retail counting for only 7%

to 8% of the overall retail market as compared to over 20% in China, and over 85% in developed

countries like the United States of America.

http://en.wikipedia.org/wiki/Convenience_store




It can be perceived that the Indian retail market

is in its nascent stage, dominated by

unorganized players that controlled the market

with 95% market share during 2009 – 10,

however the organized retailers gained market

share to 7% to 8% by 2011 – 12. There are

over 15 million ‗mom and pop‘ stores in India

which contribute to the large unorganized

market, whereas organized retail has been

limited to Urban Centre‘s.

Fig: Retail Penetration across major markets(2012)

Source: IBEF 2013

Organized retail in India is expected to cross 10% levels (of total retail market) by 2015 and 20% by

2020.

According to A T Kearney‘s Global Retail Development Index (GRDI) 2012, India was positioned the 5th

most favorable destination for international retailers. India also occupied a remarkable position in global

retail rankings, and the country is considered to have a high market potential, low economic risk, and a

moderate political risk. India also ranked 6th in the Global Apparel Index 2011. In terms of market

potential, India ranked second after Brazil. Net retail sales in India were also quite significant among

emerging and developed nations, the country is ranked 3rd

after China and Brazil.

Food and Grocery account for a major portion of the Indian

Retail Market contributing nearly 60% of the total revenues in

the sector. This translates to nearly 48% of the total household

income being spent on food and groceries.

Apparel ranks second in the overall retail market, however is

the largest segment under the organized retail sector. This can

be attributed to the increasing demand for western outfits and

garments that has been growing at 40% – 45% annually.

Fig: Indian Retail Pie

Source: Deloitte 2013

8%20% 30% 40%

55%

85%92%

80% 70% 60%45%

15%

India China Indonesia Thailand Malaysia USA

Organized Unorganized


Fig: Organized Retail Setup


Online commerce is expected to be next major area for retail growth in India. India‘s e – trailer segment is

expected to grow to a size of USD 1.5 billion by 2015. The key drivers for growing importance of online

retail are a young population aided by easier access to credit and payment options, increasing internet

penetration and speed, 24 hour accessibility, convenient and secured transactions. Computer peripherals,

camera and mobiles, and lifestyle segments account for a majority of total purchases in Online commerce.

Table: Indian Retail Structure at a glance

Type Characteristics Benefit to Consumers

Mono / Exclusive

branded retail shops

Exclusive showrooms either owned or franchised

by a manufacturer

Complete range available for a given

brand, certified product quality

Multi Branded retail

shops

Focus on particular product categories and carry

most of the available brands

Customers have more choices as

many brands are on display

Convergence retail

outlets

Display most of convergence as well as

consumer / electronic products, including

communication and IT Group

One–stop shop for customers, many

product lines of different brands on

display

e-retailers

It is an online shopping facility or buying and

selling products and services, the facility is

widely used for electronics, health and wellness

Highly convenient as it provides

24x7 access, saves time, and ensures

secure transaction

Source: IBEF 2013


The Indian Retail Industry has experienced a

growth of 10.6% CAGR between 2010 and

2012 and is expected to further grow at an

estimated CAGR of more than 18% between

2012 and 2015.

Fig: Growth of Indian Retail Sector


Within the retail sector, India has witnessed sustained growth in merchandise retail in the last decade

2002 – 2012. Even despite the economic uncertainty and the slowdown in India‘s economy, the growth of

merchandise retail is expected to continue to grow sustainably.

Table: Retail Market snapshot

2001 2012 2021

GDP (USD Bn) 450 1958 3310

Estimated merchandize consumption

(Retail Market opportunity) (USD Bn)

120 490 810

Urban Consumption (% and absolute numbers) 40%

(USD 48Bn)

48%

(USD 235 Bn)

56%

(USD 455 Bn)

Rural Consumption (% and absolute numbers) 60%

(USD 48Bn)

52%

(USD 48Bn)

44%

(USD 48Bn)

Size of Corporatized Retail (%) 4% 7% 20%

Size of Corporatized Retail (USD Bn) 5 34 162

Source: Technopak 2012

The main reason for this growth can be attributed towards India‘s GDP growth, which is expected

to grow at a sustained rate of nearly 6% in the next decade. This growth in GDP will get

translated to growing consumption in Indian households, which in turn will be manifested as

growth of merchandise retail through an increasing need for food, apparel and other sources of

discretionary spending.

India‘s share in merchandise retail is expected to grow from 48% in 2012 to nearly 56% by 2021.

Ten years ago, this contribution was approx 40%. As expected in future, an increasing share of

incremental merchandise retail will come from urban and semi – urban centers. This inference

can be drawn as an outcome of the rapid urbanization that India has witnessed in the past two

decades of sustained growth. Since 1991, India has witnessed the emergence of urban centers

with a massive scale of consumption. In 2012, there were 53 Indian cities with populations in


excess of 1 million as compared to 23 such cities in 1991, and only 5 such cities in 1951. Apart

from these urban consumption centers (Metros, Tier I, and Tier II cities), urbanization of India

will also include towns and clusters where the majority (more than 50%) of households will no

longer be dependent on agriculture.

The most crucial inference is the fact that corporatized retail‘s share of total merchandise retail

will grow from the current 8% to 20% by 2021. The retail sector started to see private

investments from both Indian and International players in the past fifteen years. In spite of these

spirited efforts, Indian corporatized retailers have managed to garner a mere 7% to 8% of the

Indian retail pie. Thus, 92% of the retail sector still comprises independent retail and is highly

fragmented. This is despite the fact that India‘s GDP grew at more than 7% in the past decade.

Table: Historical & Projected Growth Scenario’s for Indian Retail Sector

Historical Growth 2001 – 2007 2007 – 2012

India‘s real GDP CAGR 8.5% 7%

Corporatized Retail CAGR 17% 20%

Share of Corporatized Retail at the end of the period 4% 7%

Growth Forecast 6% Real

Growth

7% Real

Growth 8% Real

Growth

GDP (USD Bn) 3308 3600 3914

Overall Retail Market (USD Bn) 810 980 1065

Organized Retail Market (USD Bn) 162 246 350

Organized Retail as % of overall Retail 19% 25% 33%


In a recent report by Technopak advisors – a leading research and advisory firm, it has been estimated

that the share of corporatized retail, in a realistic scenario, will grow to no more than 20% of the total

merchandise retail pie by 2021. This will be due to the pressures of inflation and uncertainty in the world

economy, making a sustained real growth exceeding 6% over 10 years as a challenging objective. Other

reasons for this estimate have largely to do with the structural issues that adversely affect the value chain

of the retail sector. This also encompasses issues of real estate, sourcing and distribution. It is thus

opinioned that corporatized retail will not have enough leg – room to grow beyond the stated estimate.

The complexity of these issues is such that, in Technopak‘s view, ten years will not be a sufficient time

horizon for corporatized retail to overcome these hurdles and grow beyond the stated expectation.


It will however be dependent on the actions taken by respective Governments to reform their views on

this aspect of growth, and make necessary provisions accordingly.

2.3. Growth & Evolution of Retail Sector

The retail sector in India has undergone many stages of maturation to reach its present stage. However, it

is still believed to be in a nascent stage, with organized retail accounting for only 7% – 8% of the total

sector. Below figures show the graduation of Indian retail sector over a period of time from Initiation,

Conceptualization, Expansion and Consolidation stage.

Fig: Stage and Type of Indian Retail

Source: resurgentindia 2011

Two most significant and learning phases of the Indian Retail Sector have been the ‗Hyper Growth Phase‘

between 2005 t0 2007 and the ‗Consolidation Phase‘ between 2007 to 2009. It is during these two action

packet phases that the Retail sector has matured by committing several mistakes. During the ‗Hyper

Growth Phase‘ in pursuit to capture market, many companies made strategic as well as operational errors

which were as follows:

Race for increasing retail space resulting in haphazard growth

Unviable formats

High lease rentals

Man power costs and productivity issues

Poor back end infrastructure

Entry of too many new players


Then during the global slowdown 2007 – 2009, the Indian retail players paused to realize their past

mistakes and took time and effort to re – organize themselves by

Focusing on profitable growth

Exiting from unprofitable stores / formats

Rental renegotiation / revenue sharing arrangements

Reduction in salaries / higher man power productivity

Significant investments in backend

Exit of unsuccessful new entrants

Fig: Growth Cycle of Indian Retail Sector

Source: IBEF 2013

During the past decade of the evolution of the Indian Retail Sector, the organized retail segment has tried

to increase its offerings and make itself a one stop shop for its consumers. Traditionally, food and grocery

counted for the largest share of the retail segment, but with the organized sector gaining momentum, the

share of verticals has witnessed a change with the maximum share being taken by the apparels segment.


Fig: Share of Verticals in overall and organized retail

Source: Assocham & Yes Bank 2012

Food and grocery segment accounts for more than two – thirds of the overall retail in India with a

share of approximately 70% of the total market size

However, the Organized Retail Penetration (ORP) in this vertical is the lowest at 2.4%. This

vertical is dominated by kirana stores (mom and pop stores), cart vendors and wet markets in the

unorganized space.

Fig: Sale in Grocery Vs Non Grocery (2006 – 2011)



During the period 2006 to 2011, grocery retailing maintained a steady share between 65% to 68%

of the total retail sales and non – grocery retailing accounted for between 32% to 34% of the total

retail sales

Fig: Sales in store based retailing by category (2006 – 2011)


In Store – based retailing, which accounts for 99% of all sales, grocery retailers had the major

share in sales with 66% share in 2010 – 11and non – grocery retailers accounted for 34% of the

total sales during the same period

Sales by grocery retailers grew by 14.8% in 2010 – 11 and that of non – grocery retailers grew by

12.8% with the overall growth in store – based retailing at 14.1% during the same period

Grocery retailers grew at a CAGR of 12.9% over the period 2006 – 11 whereas non – grocery

retailers grew at 12.1% during the same period. Store – based retailing as a whole grew at a

CAGR of 12.6% during 2006 – 11

In absolute terms grocery retailers grew by 84.3% and non – grocery retailers grew by 72.5%

between 2006 and 2011, with the overall growth of the store – based retail segment pegged at

80.1%

The Indian retail market has traditionally been dominated by the mom and pop stores which made major

household goods available in the immediate vicinity. But with the advent of new concepts which are

better organized, the sales can be seen shifting towards the modern retail stores.

However in no case, do these formats have the potential to completely wipe out the existence of these

kirana stores as they do not reach the smallest towns of the country. Even in the metro cities the location

of the traditional and modern formats is totally varied. Furthermore, the Indian consumers tend to do a lot

of impulse buying, for which the traditional format is preferred.


Fig: Sales in Grocery Retailers by Category: 2006 – 2011 (INR Bn)


Independent small grocers such as kirana stores remained the largest channel for grocery retailing

in 2011, representing almost 68% of the total sales, and growing at 13.8% in 2010 – 11 with a

CAGR of 11.8% during 2006 – 11

Hypermarkets saw a strong and steady growth in 2011, growing by 18.2% and had a CAGR of

37.9% between 2006 and 2011

Supermarkets also witnessed strong growth in 2011 with a 13.3% increase and a 16.2% CAGR

between 2006 and 2011

Convenience stores saw the maximum growth in Modern retail formats at 27% in 2011

Fig: Sales in Modern Grocery Retail by Category (INR billion)



Fig: Sales in Traditional Grocery Retail by Category (INR billion)


Value sales of the traditional grocery retailers accounted for 98% of sales in 2011

Traditional grocery retailers as a whole grew at 14.8% during 2010-11 whereas as modern

grocery retailers exhibited a growth of 16.8% during the same period

In CAGR terms, the growth of Modern grocery retailers was almost double at 25.6% during

2006-11 as compared to that of Traditional grocery retailers which was 12.8% during the same

period

The total contribution of modern grocery retailers expanded to 2% of overall sales value in

grocery retailing, from less than 1% in 2005

Fig: Percentage Value growth in Sales (2006 – 2011)



In its recent stages, the retailing segment has come up with various new forms of selling to the consumers.

Broadly classified under Store based retailing viz the traditional form of retailing which is limited to the

presence of a physical store. Non store based retailing has developed recently with e–commerce gaining

traction. However, the share of sales of non store based retailing has been quite low but is on a gradual

increase with the increasing literacy levels and changing lifestyle of the Indian population.

Store based retailing accounted for the major share of sales in retail by category and comprised

nearly 99.2% of all retail sales in 2011

Store based retailing grew by 14% during 2010 – 11 as compared to 33.3% for non – store

retailing

Overall the retail sector grew by 14.2% during 2010 – 11

Over the period of 2006 – 11, store – based retailing grew at a CAGR of 12.6% as compared to

24.5% for non – store retailing whereas the CAGR for the retail sector as a whole was 12.7% for

the period 2006 – 11

Overall, store – based retailing has grown by 81.2% in absolute terms in the period 2006-11 and

non-store based retailing has grown by a phenomenal 200% during the same period.

The retail sector as a whole has grown by 82% in absolute terms from 2006 to 2011.

Fig: Sales in Retailing by Category (INR Billion): 2006 – 2011



3. Chapter 3 – FDI Policy in Retail

3.1. Understanding the term FDI (Foreign Direct Investment)

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the

provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in

this regard had issued a notification, which contains the Foreign Exchange Management Regulations,

2000. This notification has been amended from time to time. Department of Industrial Policy and

Promotion (DIPP) under the Ministry of Commerce and Industry, Government of India is the nodal

agency for monitoring and reviewing the FDI policy on continued basis and changes in sectoral policy /

sectoral equity cap which goes from 26% to 100% at present. The FDI policy is notified through Press

Notes / Policy Circulars by the Secretariat for Industrial Assistance (SIA), Department of Industrial

Policy and Promotion (DIPP) Ministry of Commerce & Industry. FDI is allowed under Direct Route and

Government Approval Route. The foreign investors are free to invest in India, except few sectors /

activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be

required. FDI in retail sector is allowed through Government Route only.

3.2. Evolution of FDI policy in Retail

PWC‘s 15th Annual Global CEO Survey indicated that half of CEO‘s in developed countries believed

that emerging economies are more important to their company‘s future. With the developed markets

witnessing an economic turmoil, emerging countries are fast becoming the retail hotspot for foreign

players. In the past five years, retail chain giants such as Walmart, Tesco and Metro Group, saw revenues

in developing countries grow 2.5 times faster than their home markets.

In light of the Globalization trends, the Indian Government had been anticipating, the introduction of a

Foreign Direct Investment Policy for the Indian Retail Sector, however amidst severe criticism from

conservative political opposition, the approval of the policy has undergone a long waiting period. Finally

after several years of debate, a somewhat structured FDI policy has been announced by the current

Government in September 2012, permitting FDI in Single Brand Retail Trade, and Multi Brand Retail

Trade, laying out several conditions, conceptually believed to be for the protection of the traditional

retailer, and the indigenous farmer.


Fig: Evolution of FDI policy in Indian Retail Sector

Source: Recreated from IBEF 2013 & Deloitte 2013

3.3. Structure of FDI Policy in Retail

Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which has

further been revised in 2011 and 2012 vide Press Note 1 of 2011 dt.14.2011, Press Note 2 of 2011 dt.

1.10.2011, Press Note 3 of 2011 dt.8.11.2011, Press Note 1 of 2012 dt.10.1.2012, FDI Policy Circular 1

of 2012 dt. 10.4.2012, Press Note 2 of 2012 dt. 31.7.2012, Press Note 3 of 2012 dt. 1.8.2012 and Press

Notes 4, 5, 6, 7 & 8 dt. 20.9.2012 provides the sector specific guidelines for FDI with regard to the

conduct of trading activities. Press Notes 4 & 5 dt. 20.9.2012 particularly pertains to the FDI policy for

Retail Sector. Detailed guidelines are available in the following press notes.

a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the

automatic route in 2006.

b) FDI up to 100 % with prior Government approval (i.e. FIPB) for retail trade of ―Single Brand‟

products, subject to Press Note 4 (2012 Series)

c) 51% FDI is permitted in Multi Brand Retailing in India under Government Route (Press Note 5 of

2012).


3.4. FDI Policy in Single Brand Retail Trade (SBRT)

Paragraph 6.2.16.4 of 'Circular 1 of 2012 – Consolidated FDI Policy', effective from April 10, 2012,

relating to single – brand product retail trading, presently reads as follows ―6.2.16.4 Single Brand product

retail trading under 100% Government Route

1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in

production and marketing, improving the availability of such goods for the consumer,

encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian

enterprises through access to global designs, technologies and management practices.

2) FDI in Single Brand product retail trading is subject to the following conditions:

a. Products to be sold should be of a 'Single Brand' only

b. Products should be sold under the same brand internationally i.e. products should be sold

under the same brand in one or more countries other than India.

c. 'Single Brand' product-retail trading would cover only products which are branded during

manufacturing

d. The foreign investor should be the owner of the brand.

e. In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30%

of the value of products sold would have to be done from Indian 'small industries/ village

and cottage industries, artisans and craftsmen'. 'Small industries' would be defined as

industries which have a total investment in plant & machinery not exceeding US $ 1.00

million. This valuation refers to the value at the time of installation, without providing for

depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall

not qualify as a 'small industry' for this purpose. The compliance of this condition will be

ensured through self – certification by the company, to be subsequently checked, by

statutory auditors, from the duly certified accounts, which the company will be required

to maintain.

3) Application seeking permission of the Government for FDI in retail trade of 'Single Brand'

products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of

Industrial Policy & Promotion. The application would specifically indicate the product, Product

categories which are proposed to be sold under a 'Single Brand'. Any addition to the product,

product categories to be sold under 'Single Brand' would require a fresh approval of the

Government.


4) Applications would be processed in the Department of Industrial Policy & Promotion, to

determine whether the products proposed to be sold satisfy the notified guidelines, before being

considered by the FIPB for Government approval‖

Revision dated 20/09/2012

―Revised Position w.e.f.20.9.2012: 2.1 The Government of India has reviewed the position in this regard

and decided to amend paragraphs 6.2.16.4 (2) (d) & 6.2.16.4 (2) (e) of the existing policy. 3.0

Amendment to paragraph 6.2.16.4: 3.1 Accordingly, paragraph 6.2.16.4 of 'Circular 1 of 2012-

Conso1idated FDI Policy', effective from April 10, 2012, is amended, as below: 6.2.16.4 Single Brand

product retail trading under 100% Government Route.

1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in

production and marketing, improving the availability of such goods for the consumer,

encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian

enterprises through access to global designs, technologies and management practices.

2) FDI in Single Brand product retail trading would be subject to the following conditions:

a. Products to be sold should be of a 'Single Brand' only.

b. Products should be sold under the same brand internationally i.e. products should be sold

under the same brand in one or more countries other than India.

c. 'Single Brand' product-retail trading would cover only products which are branded during

manufacturing.

d. Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted

to undertake single brand product retail trading in the country, for the specific brand,

through a legally tenable agreement, with the brand owner for undertaking single brand

product retail trading in respect of the specific brand for which approval is being sought.

The onus for ensuring compliance with this condition shall rest with the Indian entity

carrying out single-brand product retail trading in India. The investing entity shall

provide evidence to this effect at the time of seeking approval, including a copy of the

licensing / Franchise / sub – license agreement, specifically indicating compliance with

the above condition.

e. In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of

goods purchased will be done from India, preferably from MSMEs, village and cottage

industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will

be self-certified by the company, to be subsequently checked, by statutory auditors, from

the duly certified accounts which the company will be required to maintain. This


procurement requirement would have to be met, in the first instance, as an average of five

years total value of the goods purchased, beginning April of the year during which the

first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.

For the purpose of ascertaining the sourcing requirement, the relevant entity would be the

company, incorporated in India, which is the recipient of FDI for the purpose of carrying

out single-brand product retail trading.

f. Retail trading, in any form, by means of e – commerce, would not be permissible, for

companies with FDI, engaged in the activity of single-brand retail trading.

3) Applications seeking permission of the Government for FDI in retail trade of ‗Single Brand‘

products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of

Industrial Policy & Promotion. The applications would specifically indicate the product / product

categories which are proposed to be sold under a ‗Single Brand‘. Any addition to the product /

product categories to be sold under ‗Single Brand‘ would require a fresh approval of the

Government.‖

3.5. FDI Policy in Multi Brand Retail Trade (MBRT)

51% FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple

brands under one roof with the following conditions:

1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following

conditions: Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh

poultry, fishery and meat products, may be unbranded

2) Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.

3) At least 50% of total FDI brought in shall be invested in ‗backend infrastructure‘ within three

years of the first tranche of FDI, where ‗backend infrastructure‘ will include capital expenditure

on all activities, excluding that on front – end units, for instance, back end infrastructure will

include investment made towards processing, manufacturing, distribution, design improvement,

quality control, packaging, logistics, storage, warehouse, agriculture market produce

infrastructure etc

4) Expenditure on land cost and rentals, if any, will not be counted for purposes of back end

infrastructure


5) At least 30% of the value of procurement of manufactured processed products purchased shall be

sourced from Indian ‗small industries‘ which have a total investment in plant & machinery not

exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without

providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry

shall not qualify as a ‗small industry‘ for this purpose. This procurement requirement would have

to be met, in the first instance, as an average of five years total value of the manufactured

processed products purchased, beginning 1st April of the year during which the first tranche of

FDI is received. Thereafter, it would have to be met on an annual basis.

6) Self-certification by the company, to ensure compliance of the conditions at serial nos. (2), (3)

and (4) above, which could be cross – checked, as and when required. Accordingly, the investors

shall maintain accounts, duly certified by statutory auditors.

7) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per

2011 Census and may also cover an area of 10 kms around the municipal / urban agglomeration

limits of such cities. Retail locations will be restricted to conforming areas as per the Master /

Zonal Plans of the concerned cities and provision will be made for requisite facilities such as

transport connectivity and parking. In States / Union Territories not having cities with population

of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their

choice, preferably the largest city and may also cover an area of 10 kms around the municipal /

urban agglomeration limits of such cities. The locations of such outlets will be restricted to

conforming areas, as per the Master / Zonal Plans of the concerned cities and provision will be

made for requisite facilities such as Transport connectivity and parking.

Table: FDI in retail trading – snapshot of recent policy changes

Source: BMR Taxand 2012

Previous FDI Policy Revised FDI Policy

Single Brand

Retail Trading

(SBRT)

FDI upto 100% permitted under

Government approval route subject to

onerous conditions

FDI upto 100% permitted under Government

approval route Liberalization of conditions

w.r.t

Ownership of ‗brand‘

Local sourcing obligation

Multi Brand

Retail Trading

(MBRT)

FDI was prohibited in MBRT, except

in Cash & Carry Wholesale Trading

FDI upto 51% permitted in MBRT, under

Government approval route, subject to

specified conditions

Presently possible only in specified

states / union territories


3.6. FDI Policy E – Commerce

100% FDI has been permitted in E – commerce under the automatic route

E-commerce understood as activity of buying and selling through the E – commerce platform

Only Business to Business (B2B) E – commerce permitted

As per recent policy, companies engaged in SBRT and MBRT are not permitted retail trading

by way of E – commerce

To provide B2C services, several foreign investors have adopted structures involving tie –

ups with domestic online retail websites

Status is unclear if E – commerce includes M – commerce (mobile commerce)

Need for separate policy / guidelines for E – commerce distinguishing it from retail trading

3.7. Acceptance of FDI Policy by Indian States

The main opposition party of India and its allies constantly opposed the introduction of FDI in multi –

brand retail in 2012. Some of the ruling party allies such as DMK, UDF (Kerala) were also against the

policy.

States in Favor of

1. Maharashtra

2. Haryana

3. Andhra Pradesh

4. Rajasthan

5. Jammu & Kashmir

6. Uttrakhand

7. Manipur

8. Assam

9. Delhi

States Opposing

1. Gujarat

2. Uttar Pradesh

3. West Bengal

4. Bihar

5. Tamil Nadu

6. Kerala

7. Chattisgarh

8. Odisha Source:



However, post elections in Karnataka, Madhya Pradesh, and Chhattisgarh, these states may change their

stance on FDI in MBRT depending on who comes to power.

The principal opposition party supported the FDI in Multi-Brand Retail when it was in power at the

Center in 2002. Further, many of the current allies who oppose the policy are still supporting the UPA

Government.

4. Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other countries

To understand the impact of FDI in retail on other nations similar to India in terms of demographics and

various macroeconomic factors, major impacts on countries like China, Thailand, Indonesia, Brazil,

Russia and Mexico can be compared.

4.1. China

China developed its open door policy in the aspect of FDI in retail in order to take a transition from a

―planning‖ to a ―market‖ economy.

Following has been the series of events with respect to FDI in retail in China:

i. FDI in retailing was allowed in China for the first time in 1992. Foreign ownership was

initially restricted to 49%.

ii. In December 2004, the Chinese government lifted all the restrictions on FDI in Retail.

iii. After liberalization of the retail sector in China (1996 – 2001), following changes took place

a. Over 600 hypermarkets were opened between 1996 and 2001

b. The number of small outlets increased from 1.9 million to over 2.5 million

c. Number of traditional retailers in China also increased by around 30%

d. Employment in the retail increased from 28 million people to 54 million people.

Employment in the retail and wholesale trade increased from about 4% of the total labour

force in 1992 to about 7% in 2001.

e. The country witnessed an average GDP growth rate of 8% after the introduction of FDI

in Retail

f. Inflation rate decreased to -0.8% and -1.4% in 1998 and 1999 respectively. Now after 20

years, inflation rate is at 2% rather than 14.6% and 24.2% in 1993 and 1994.

g. The total FDI inflow & outflow in retail also increased significantly after the introduction

of FDI in retail leading to increased trade openness.


4.2. Thailand

FDI in Retail was introduced in 1997 in Thailand. However, many adverse effects of FDI in retail were

observed. Thailand permits 100% foreign equity, with no limit on the number of outlets.

Following has been the series of events with respect to FDI in retail in Thailand:

i. Traditionally, wet market and small family owned grocery stores dominated the Thai Retail

industry. After the Asian crisis in 1997, the entry ban on foreign players was removed and

soon, the foreign players increased and developed their operations significantly. Eventually,

most of the local players had to close down their business.

ii. However, there were certain positive effects as well:

a. Expansion of organized retailing and soon Thailand emerged as a major shopping

destination for global travelers.

b. The Agro and food processing industry received huge encouragement and lead to

enhancement of exports

iii. Impact on macroeconomic factors:

a. GDP growth rate of Thailand plummeted to -10.5% in 1998 due to the shutting down of

local retailers.

b. Unemployment rate remained low.

c. Inflation rate also remained at 0.3%

d. The openness indicator reached its maximum in 2002.

e. FDI inflows increased to 7.3 Bn in 1998.

4.3. Indonesia

Modern retail was introduced in Indonesia in the 1990‘s and mostly involved domestic chains. FDI in

retail led to the multi – nationalization and rapid consolidation of the supermarket sectors.

Following is the sequence of events with respect to FDI in retail in Indonesia:

i. Currently, Indonesia permits 100% foreign equity in retail business, with absolutely no limit

on the number of outlets.

ii. In 1958, the leading chain Matahari started as a small shop, and expanded into a chain of

department stores, and was then bought by a giant banking and real estate conglomerate

Lippo Group in 1997. Between 2002 and 2006, Matahari doubled its sales, becoming a

billion-dollar chain.


iii. Impact on macroeconomic factors

a. A deep economic recession in 1997 – 98 led to inflation of 80% during the mid 1997

b. During the same period, the GDP growth plunged to -13%

c. The Indonesian Government introduced a wide range of institutional reforms and a

redirected monetary policy towards maintaining price and exchange rate stability.

Eventually, price stability was reinstated.

d. Export, imports and the real exchange rate remained consistent

e. There was an increasing effect of FDI in retail on the total FDI inflows in retail.

However, FDI outflows in retail dropped after 1994.

4.4. Brazil

The Impact on macroeconomic factors since the opening of FDI in retail in Brazil (1994) has been as

follows:

i. According to a report by CUTS International, since opening up to the foreign investment in

1994, the traditional small retailers managed to increase their market shares by 27%

ii. The annual GDP growth remained stable and positive

iii. The unemployment rate decreased after 1994 after its maximum at 9.6

iv. After 1994, the Brazilian currency (Real) appreciated with respect to U.S Dollar

v. The value of exports and imports too increased after 1994

vi. In 1998, the total FDI inflows in retail reached their peak

4.5. Russia

Russia witnessed a supermarket revolution in 2000‘s. In 2002, sales of the top – 15 retail chains in Russia

amounted to $2.7 billion, by 2006, the sales of these chains surged to $19.2 billion. The share of the top –

3 retail chains jumped from about 40% in 2002 to 54% in 2006. Sales from foreign retailers stood at 33%

in 2002 and 35 % in 2006 leading to 8 foreign chains being amongst the top 15.

The Impact on macroeconomic factors since the opening of FDI in retail in Russia has been as follows:

i. The GDP growth has been positive

ii. Since 2000, the unemployment rate has decreased.

iii. After 2002, a sharp increase was observed in FDI inflows and outflows in retail.


4.6. Mexico

Until the early 1990s, nearly all the retail sales in Mexico were dominated by domestic chains. Mexico

opened its doors to foreign retailers in 1991. By 2002, 48% of the $24 billion from retail sales was

accounted by the top – 7 chains. By 2006, the sales from these top – 7 chains nearly doubled to $38

billion, and out of which 53% was by foreigners.

The Impact on macroeconomic factors since the opening of FDI in retail in Mexico has been as follows:

i. With the influx of foreign retailers in 1991, few major retail stores started dominating the

market, and many of the smaller retailers were made to shut down. By 2001, only 4 chains

dominated the market:

a. Wal-Mart de Mexico(Walmex) with almost half (45.6 percent)

b. Comerical Mexicana with a little over a fifth (20.6 percent) market share

c. Gigante with 15.5 percent share

d. Soriana with 14 percent share

ii. The GDP rate has been consistent except in 1995 when it reached -6.2

iii. Wal-Mart took over nearly half of Mexico's retail business with just over 200,000 employees

iv. The unemployment rate increased to 6.9 in 1995

v. Though the value of exports and imports was consistent throughout but the exchange rate was

seen fluctuating after 1991

vi. An increase in the total FDI inflows in retail was observed

5. Chapter 5 – Impact of FDI in Retail in China


As per a research paper by Kaanan Gupta in 2012, on ―FDI in multi brand retailing – Lessons from

China‖, the operations of the global supermarkets in China indicated that the entry of foreign retailers did

not make much difference to the producer‘s share in the consumer‘s rupee. Due to the sheer size and

buying power of foreign supermarkets, the producer prices did get a bit depressed, however, they were

compensated in the long run. As per the research paper; for a farmer from Hebei province in China, who

grew vegetables on a 0.67 hectare plot of land, the opening of retail had increased, not reduced his client

base. He had direct sales in a Beijing neighborhood every evening, while also supplying to a supermarket

chain.


Further there had been an impact in improving the productivity of farmers, by increasing the size of their

landholdings. For another instance, each household in Hebei, had between 0.06 and 0.13 hectare of

cultivable land, but as more farmers moved to the cities for work, they rented out their land to those

farmers who stayed behind.

However, consolidation of the retail sector in China, as a result of the government – supported rise of

local retail giants in order to protect them from foreign retailers, had put many small farmers who could

not cope with lower prices, out of work.

5.2. Impact on Organized Retail

China's largest retail chains in 2010, were all Chinese companies — the Shanghai Bailian group, Suning

Home Appliances, Gome Home Appliances and Dashang Group, all had bigger sales than Walmart in

China.

Table: Top 10 Chinese Retail Chains 2010

Rank Name of Company Sales

(Bn. US$ )

Number

of Stores

Operational Format Region

of Origin

Regions of

Operation

1 Suning Appliance

Group

24.76 1,342 Electronics Specialty China More than 300

cities in all

regions, Hong

Kong, Japan

2 Gome Electrical

Appliances

Company Limited

24.55 1,346 Electronics Specialty China More than 200

cities in all

regions

3 Bailian Group

Company Limited

16.43 5,809 Supermarket, Department

Store, Convenience Store,

Home Improvement

China 20 provinces

and cities in

China

4 Dashang Group

Company Limited

13.66 170 Supermarket, Department

Store, Electronics

Specialty, Home

Improvement

China Northeast

China, North

China and

West China

5 Vanguard Company

Limited



Drug Store, Food and

Beverage

China 27 provinces

and cities in

China

6 RT-MART

International

Company Limited

7.96 143 Supermarket Taiwan 21 provinces

and cities in

China

7 Carrefour Société

Anonyme (China)

6.66 182 Supermarket France 21 provinces

and cities in

China

8 Anhui Huishang

Group Company

Limited



Electronics Specialty

China 50 cities in

China

9 Wal-Mart Stores,

Incorporation

6.34 219 Supermarket US 20 provinces

and cities in


(China) China

10 Chongqing General

Trading (Group)

Company Limited

6.06 319 Supermarket, Department

Store, Electronics

Specialty

China Chongqing,

Sichuan,

Guizhou

Source: Kaanan Gupta 2012

This was primarily because the global retail giant‘s strengths in their home countries were based on

factors that are totally absent in other countries. For instance, Wal-Mart was able to drive costs down

because of its incredible logistics and supply chain networks, which were absent in China. Further the

physical infrastructure like roads and ports were not as developed in China, to the same level as they are

in the US and thus it did not provide the kind of scale that they require to negotiate and bargain with the

suppliers and drive down the cost.

Post liberalization, competition became cut-throat in the supermarket and the hypermarket segment of

China‘s retail segment. By 2010, the largest player in the supermarket segment, the China-based Shanghai

Bailian Group (with 5,809 stores in 2010), constituted only 11% in terms of market share. Even Wal-Mart

which dominates the retail market in the United States, occupied only around 6% market share in China,

despite of the fact the big – box retailer had set up shop nearly 15years ago in the country. RT-Mart

International Limited, a Taiwan-headquartered company was the biggest retailer on the Chinese mainland

with 6.3% market share until mid-2011, attracting more than one-fourth of households in the mainland

market. The French retail giant Carrefour Group, the world's second-largest retailer by revenue held a

4.9% market share during 2010. Tesco Public limited company, the world's third-largest grocer by

revenue, had a 2.1% market share in China over the year 2011. CR-Vanguard Group saw its market share

rise from 6.2% in the second quarter of 2010 to 6.7% in the second quarter of 2011.

The overall number of foreign retail stores in China in the Top 100 increased by 25.64%, exceeding the

11.49% of Chinese retail stores in 2010. There were 135 newly-opened stores of the six major foreign

supermarket operators in 2010, up 22.77% over the previous year.

Among the Top 100, foreign retailers had a sales growth of 18.09% in 2010, vs 25.3% sales growth of

Chinese retailers.

5.3. Impact on Traditional Retail

Since the opening up of Retail sector in 1992, China has attracted huge investments without affecting

either the small retailers or domestic retail chains. In fact, between 2004 – 2010, the number of small

Chinese outlets had increased to around 2.5 million from 1.9 million. It was because the market was so

large and growing so quickly that even today, hypermarkets, convenience stores and other examples of


organized retail make up less than half of the urban food market. In China, unorganized retail, represented

by street vendors and neighborhood ―community retailers‖, continued to thrive, offering cheaper prices

than supermarkets and retail chains. Further, the products which are offered at a lower price by modern

retail are less relevant for the poor who buy them loose in small quantities. Likewise, the presence of big

global retailers in rural China is also much smaller.

Certainly consolidation of the retail sector in China, as a result of the government-supported rise of local

retail giants like Bailian, has put many small retailers who could not cope with the surge in number of

competitors and lower prices, out of work. Nevertheless, the job losses in China have not been felt

because of the pace of urbanization and the growth of cities.


Though it is somewhat perceived that in China, the global big – box retailers have mostly focused more

on opening stores in a drive to capture the market share, there has not been much investment in making

supply chain improvements and operational efficiencies. Wal-Mart has a 40,000 square meter, central

distribution centre in Kengzian (China) and Carrefour uses a different approach, it relies more on local

distributors to deliver direct to the stores to reduce the cost of developing its supplier network and supply

chain. Yet, almost two decades after China opened up retail fully, the sector has seen rapid growth against

the backdrop of increased market consolidation, higher production efficiency enabled by rising

investments in rural infrastructure and booming exports made possible by the setting up of new supply

chains.


It is evident that the entry of global retail giants heats up the competition, giving consumers a better deal,

both in prices and choices. Mega retail chains need to keep price points low and attractive – that is the

USP of their business. This is done by smart procurement and inventory management, good practices.

For Chinese consumers the attractions of hypermarkets are low prices and one stop shopping for food and

general merchandise. China‘s middle class consumers visit hypermarkets once every 10 days on average.

While hypermarkets are gaining market share among food retailers, the majority of consumers still bought

food at supermarket stores and traditional open markets, especially in rural areas where supermarkets do

not exist.


6. Chapter 6 – Critical Analysis of Impact of FDI in Retail in India


Since the early 1990s, supermarkets have revolutionized retail sector in developing countries. In order to

reach the mass market, supermarkets have now developed beyond the middle class and upper class

segments. This process has affected not only the traditional retailers, but a much broader spectrum

covering the wholesale, processing, and farm sectors within the entire supply chain. With respect to

quality, costs, volume, consistency and commercial practices, supermarkets require more from suppliers

when they modernize their procurement systems. Supermarkets affect suppliers in a biggest way for food-

manufacturing enterprises, since some 80% of contents sold by supermarkets comprise of processed,

staple, or semi-processed products.

In order to suffice the requirements desired by their clients, Supermarkets have to support small farmers

with training, credit, equipment, etc when they are unable to source from large scale or medium scale

farmers, and the small farmers lack the much needed assets.

The farmers in this way are not only be able to increase their output but also get better rewards in terms of

supplying to organized retailers by tying up long term contracts with them.

With the entry of Global retail giants, the farmers across India‘s 6,00,000 villages are expected to gain

with higher profits and better market access. As the competition increases, the farmers would get good

prices for their harvest. The original producers would get a higher price for their produce, since the profit

will flow to them directly, leaving behind the middle men. This is anticipated to happen as the giant

retailers have more access to capital and a high buying power. Direct purchase from farms will hugely

benefit small farmers who are not getting good returns by selling in the local wholesale market. The

payments will be made directly to the producers and will be free from commission agents. In turn these

large retailers will also benefit by saving 10 – 15% in commissions by purchasing fruits and vegetables

directly.

An Empirical analysis carried out by Sinha & Singhal (March 2013) shows that farmers tend to earn from

20% to 50% more in net terms when they enter direct supermarket channels. For example, net profit was

33% –39% higher among supermarket channel participants compared to traditional market participants

amongst tomato farmers in Indonesia. However this would require more up – front investment by the

farmers to meet greater demands for quality, consistency, and volume compared with marketing to

traditional markets.


FDI in multi – brand retail is an important step to push more growth in the sector. Case studies of MNC‘s

helping farmer communities in India like PepsiCo India‘s potato farming program and Bharti Wal –

Mart‘s initiative through Direct Farm Project and several others suggest that opening of Indian retail

sector to FDI is a win – win situation for farmers.

Farmers would benefit significantly from the option of direct sales to organized retailers. Global majors

such as Wal-Mart, Carrefour and Tesco are expected to bring a global scale in their negotiations with the

MNCs such as Unilever, Nestlé, P&G, Pepsi, Coke, etc.

The improved cold chain and storage infrastructure will no doubt lead to a reduction in losses of

agriculture produce. It may also lead to removal of intermediaries in the retail value chain and curtail

other inefficiencies resulting in higher income to a farmer.

6.2. Impact on Traditional Markets

It is being anticipated that with the advent of major organized retail players in India, the existence of

traditional mom and pop stores will be in question. However, there is a theory that analyses co –

existence. The size, complexity and diversity of retail industry is a huge advantage for the smaller players

in India, however most of the organized retailers have opened shop in the Metros, Tier 1 and Tier 2

towns.

This has been the main reason, believed to be preventing the liberalization of the FDI norms for Indian

retail for very long. Political oppositions have time and again argued:

a) Adverse affect by the entry of global retail giants: Since these retailers have advanced capabilities

of scale and infrastructure along with being cash rich, this may result in the loss of jobs for people

in the Indian unorganized sector.

b) Better operational efficiencies of the organized players: Lower product prices by global giants

may hamper the profit margins of the unorganized players.

On the contrary some theorists believe, Multi – brand retail, if allowed, can transform the retail sector in

the following significant ways:

a) Firstly, the organized players are expected to bring in the much needed investment which will

help the domestic retailers that don‗t have the resources to sail through, during economic crisis.

b) Infrastructure support extended to improve the backend processes would enable to eliminate such

extreme wastages and enhance the supply chain operational efficiency.

c) FDI in multi – brand retail would in no way endanger the jobs of the people employed in the

unorganized retail sector. It would rather lead to the creation of millions of jobs as massive


infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban

Indian who is keen on allocating the disposable income towards organized retailing like big box

stores along with the local kirana stores. These stores would be able to retain their importance

owing to their unique characteristics of convenience, proximity and skills in retaining customers.

Also, these would be more prominent in the Tier-II and Tier-III cities where the organized

supermarkets would find it harder to establish themselves.

Another way of approaching the problem is to analyze if the growth in market share by the International

Retailers will kill the Independent Retailers. Technopak advisors in their white paper on ―FDI‘s Impact on

Indian Retail sector and Indian Economy‖ (October 2012), have suggested that Corporatized retail is

expected to grow its share from the current 7% to nearly 20% in the next decade. By 2021, this will

translate into USD 162 billion in revenue for corporatized retail.

Table: Comparison of Corporatized, Independent and International Retail

2001 2012 2021

Estimated merchandise consumption (USD Bn) 120 490 810

Share of Independent Retail 96% 93% 80%

Size of Independent Retail ~115 436 648

Share of Corporatized Retail ~4% ~7% ~20%

Size of Corporatized Retail 5 34 162

Share of Indian Corporatized Retailers in total Corporatized Retail ~100% ~95% 50%

Share of International Retailers or International Retailers assisted Retail 50%

Size of International Retailers (USD Bn) 80


In 2011, the total revenue of all hypermarkets (largely international retailers) in China was USD 80

billion including the revenues of Walmart, Carrefour, Tesco and other regional players. This is after a 15

year long journey for these retailers, in China.

Optimistically, if it is assumed that retail sector reforms in India will lead to the creation of a similar scale

for these players then, in 2021, all the international retailers in India can at best aspire for a USD 80

billion revenue share. This translates to approx 50% of the total revenues (USD 162 billion) coming from

organized retail in 2021, with Indian corporatized retailers contributing the balance. This further translates

to around 10% of the total retail market each for international and Indian corporatized retailers by 2021.

Technopak‘s analysis therefore assumes that international retailer‘s share of the Indian retail sector would

be no more than 10% in the next 10 years, even in a best – case scenario. Even with this being the case,

90% of the retail sector will still be attributable to independent retail or Indian corporatized retail.



India is now home to the largest number of moneyed consumers. One of the key drivers in the growth in

retailing is the increased consumer demand resulting due to the growth of consumer groups with

disposable income between USD 2,500 and USD 10,000 per annum which grew from 47% in 2010 to

50% in 2011. The strongest impact of organized retailing would be seen on these consumers. Along with

the increase in disposable income and increased discretionary expenditure, the consumers will get better

choice of formats.

Due to the Direct Procurement model followed by organized retailers, there would be substantial cost

savings through disintermediation which would ultimately benefit the consumer.

Fig: Illustration for effect of direct procurement on Farmer and Consumer Price.

Source:Assocham & Yes Bank 2012

The Indian consumers will soon have the luxury of world class opportunity of shopping to meet the

requirements of their daily life. They will find a new world of enjoyment of picking up consumer items to

their greatest satisfaction. Big retailers will often allow discounts on selected items which will facilitate

the consumers and they can end up with marginal bargains.



As per Industry estimates 35 – 40% of India‘s total production of fruits and vegetables and nearly 10% of

food grains, is wasted every year due to inadequate storage and transport facilities. Lack of adequate

storage facilities causes heavy losses to farmers in terms of quality degradation and wastage of produce in

general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of

fruits, vegetables and other perishables, have been estimated to be over INR 1 trillion per annum, 57% of

which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.

Though India is the second largest producer of fruits and vegetables (about 200 million MT), it has a very

limited integrated cold – chain infrastructure, with only 5,386 stand-alone cold storages, having a total

capacity of 23.6 million MT. It is estimated that India is already facing a shortage in Cold Storage space

by about 9 – 10 million MT. Moreover, the existing cold storage facilities now available are mostly for a

single commodity and around 80% of them are utilized for potato storage resulting in poor capacity

utilization. Since Indian agriculture is witnessing a major shift from traditional farming to horticulture,

meat, poultry and dairy products and the demand for fresh and processed fruits and vegetables is

increasing due to rising urban population and transforming consumption habits, the role of cold storages

becomes critical.

Further, the warehousing capacity available in India, in public, co-operative and private sector is about

108.75 million MT and another 35 million MT warehousing capacity is required during the Twelfth Five

Year Plan period for the storage of all major crops. This clearly indicates to the huge demand supply

mismatch. Moreover, the warehouses in our country have been built following traditional norms and

without proper specifications. They lack in optimal size, adequate design, ventilation facility, inventory

management and storage system.

Almost half of this wastage can be prevented if fruit and vegetable retailers have access to specialized

cold storage facilities and refrigerated trucks. Though FDI is permitted in cold – chain to the extent of

100%, through the automatic route, in the absence of FDI in front – end retail, investment flows into this

sector have been insignificant.

The opening up of FDI in Retail will bring in investments in this field compulsorily as the modern retail

formats will procure large quantities to gain economies of scale and will try to avoid wastages due to

improper storage facilities. As the business of organized retailing of food matures, it would increase

private investment in the area of supply chain infrastructure.

The organized retail will bring in efficient practices that will help farmers in the procurement process,

reduce wastage with finally efficient storage and will finally cut the losses. The giant retailers will help


India to have strong storage system with highly developed transportation. This is also going to get a boost

from the various schemes of the Government to incentivize rural infrastructure creation (Terminal

Markets, Mega Food Parks, Rural Godowns etc.). This will benefit the farmers immensely by creating

feasible and competitive marketing alternatives for their produce. Giant retailers with decades of

experience on how to manage mountains of inventories, supply them to key distribution centers and do it

all faster, better, cheaper. The arrival of foreign retailers will definitely bring in synergies in distribution

management practices.

Agricultural value chains have increasingly become complex over time. Market requirements rapidly

change, driven by increasing demand, changing lifestyles and government policies.

In response to these changing market requirements, value chains need to become more coordinated

leading to more integration and concentration to achieve efficiency and minimize risks.

Product and market standards change with time which in turn, require changes from various factors in the

value chain that supply these products to meet market requirements. But this has not been the case with

the Indian Agriculture supply chain which has by and large remained the same over the years, not

incorporating the required changes for development and increased efficiency.

The farmers in India receive a share of less than 30% for most of the food grains and 15% – 20% for

horticultural produce, while in developed countries the share comes to around 50% – 70% for most of the

commodities. This is basically because of the large number of intermediaries involved in the chain.

Intermediaries, no doubt are an essential part of the chain and they add value to the commodities and help

in aggregation.

But this intermediation should essentially be limited to the level where value is actually being added. In

India unnecessary intermediaries get involved along the chain resulting in margin payouts at various

levels and losses due to multiple handling.

The margins taken by the intermediaries are generally product specific and are higher for fresh produce,

having shorter shelf life.

For grains and cereals, around 28% margin is added to the cost, before the produce reaches the

processors. Further costs are added when the produce is processed and passes through the Mandis. This

cost accounts for a 12% increase. These margins considerably increase the prices of grains and cereals for

end consumers.

Similar is the case with fruits and vegetables where significant margins are added up to the cost of

produce. But these margins are significantly higher in case of Fruits and Vegetables owing to their shorter


shelf life and greater perish ability. In case of fresh fruits and vegetables, around 47% margin is added to

the cost of produce before it reaches for processing.

Further margins are added up during processing and movement through different levels in Mandis.

Generally, the prices of the produce double in such cases.

Entry of players in the organized retail tends to make the supply chain more effective and efficient by:

Sourcing directly from the farmers or at least closer to the farm gate and eliminating the

unnecessary intermediaries. This in turn results in better price realization to the farmers.

Overall, farmers are bound to gain from the advent of the organized food retailers under a proper

regulatory environment promoting direct procurement on one hand and machinery to prevent the

exploitation of farmers on the other hand.

Direct procurement also gives the farmers certain indirect benefits like knowledge of what needs

to be produced when, technological inputs and access to credit on account of assured market etc.

FDI in retail will eliminate or greatly reduce the role of middlemen and ensure a sustainable and

reasonable price for both the farmer and the consumer by shortening the supply chain through

increase in direct purchase

The players in the organized retail sector will put in all efforts to reduce wastage at all levels by a

substantial amount. FDI will bring in a spurt of investments in latest technologies for storage,

handling, processing and market information.

Fair grading weighment and payment would be the key areas of benefit for the farmers. This will

also encourage the farmers to grow better quality produce as it would command better prices. The

payment structure in most of the organized retail is prompt and inclusive of the cost of

transportation. This is a great benefit to the farmer.

As the organized retail focuses on good quality products, adulteration of food will be kept under

check.

There is a greater deal of transparency in organized retail and monitoring is much easier.

On the farming front retailers can partner with farmers to enhance their farming practices by providing

access to Finance, technical support and inputs.


Fig: Efficiency in Supply Chain

Source:Assocham & Yes Bank 2012


Employment generation in the retail sector is a function of size and productivity within the sector. As we

are aware that the productivity norms differ between independent and corporatized retail thus an

assessment needs to be made to analyze the respective shares of independent and corporatized retail,

mapped against the respective productivity norms in order to determine the net impact of both

independent and corporatized retail on employment.

India is home to approx 15 million points of sale, or shops, of which a majority are run as standalone

entities owned and operated by members of the same family. These ―independent retail‖ shops thus

provide employment to family members and also paid employees. Almost all the paid employees in these

shops are part of an informal workforce and as such have no minimum wage or fixed working hours.

Employment in this segment averages approx 1.5 employees per shop.


On the other hand, employment in corporatized retail comprises employees working on the shop floor,

clerks manning the billing counters, security guards and employees in central / corporatized functions.

The productivity norms for employment in corporatized retail are a function of sales per square feet, or

sq. ft., and employees per sq. ft.

In 2001, the share of corporatized retail in the retail sector was under 5% and the remaining 95% was

constituted by independent retail. By 2011, the share of corporatized retail grew to 7% and is projected to

grow further to 20% by 2021.

Table: Relation between Retail & Employment

2001 2012 2021

GDP (USD Bn) 450 1958 3310

Estimated merchandise consumption (retail market opportunity) (USD Bn) 120 490 810

Share of Independent Retail (USD Bn) 115 455 648

No. of direct employees in Independent Retail (Mn) 18 22 32

Share of Corporatized Retail (USD Bn) 5 34 162

No. of direct employees in Corporatized Retail (Mn) 0.1 0.7 3.3

Source:Technopak 2012

The above table shows the relation between share of independent and corporatized retail viz the number

of direct employees in the respective segment. It is evident that independent retail has added 4 million

jobs in the last decade. In the next decade, while corporatized retail is expected add another 2.6 million

jobs, independent retail will also create 9 million more jobs.

We can hence conclude, contrary to the belief that opening of FDI in retail will lead to a loss of jobs in

traditional retail, rather it can be inferred that opening up the retail sector will create new jobs in

corporatized retail, but the extent of this job creation will be limited by corporatized retail‘s inability to

grow its share in total merchandise retail, and the Independent retail sector will however continue to add

many more employment opportunities.

6.6. Impact on Inflation

We have seen above that the supply chain for retail operations comprises product development,

merchandising, vendor development, logistics, warehousing, in-store selling etc. Inarguably, retailing

requires scale, precision and efficiency in the supply chain for retailers to be profitable. Retailers do this

by integrating the supply chain thus ensuring that quality merchandise is delivered faster without damage

or leakage of any kind. The efficient working of this supply chain reduces the costs incurred in making

goods reach the consumer.

This reduction in the distribution cost of merchandise is passed on to the consumer through a lower retail

price for that merchandise. Thus, it contributes positively in reducing inflation.


However, it is important to understand the various categories that make up merchandise retail and the

contribution of corporatized retail to each of these categories. Food has the largest impact on consumer

price inflation. This is validated by the fact that today 70% of merchandise retailing comprises food &

groceries. Therefore, mapping the share of corporatized retail in dispensing food merchandise will give an

objective picture of corporatized retail‘s ability (present and future) to tame inflation.

Table: Share of Retail Segments

2012 2021

Total Retail

USD Bn

Corporatized Retail

(Share of Total Retail)

Total Retail

USD Bn

Corporatized Retail

(Share of Total Retail)

Food & Groceries 343 10 (3%) 486 24 (5%)

Apparel 38 6 (16%) 62 11 (17%)

Others 110 17 (15%) 262 125 (48%)

490 34 (7%) 810 162 (20%)


For simplicity, merchandise retail is broadly classified into three categories - Food & Groceries, Apparel,

and Others (Jewelry & Watches, Electronics, Home Improvement, Pharmacy, Footwear etc.)

While 70% of total merchandise retail comprises Food & Groceries, only 3% of Food & Groceries is

retailed through corporatized retail. This scenario is not going to change much in the coming decade.

While, corporatized retail‘s share will register an impressive growth in other categories, Food &

Groceries will prove to be a challenge. By 2021, the share of corporatized retail in Food & Groceries

retail is expected to grow by a mere 2 percentage points, to around 5%. This is largely to do with the

market structure on the supply side of the Indian economy. This market structure will not allow

corporatized retailers to integrate their food & groceries supply chain. The lack of direct access to farmers

for sourcing, interstate movement of goods, tax structures, and inadequate capacities in the food supply

chain will act as the chief barriers to this integration. The inability of corporatized retail to grow its share

in food & groceries retail can therefore limit its impact in achieving the intended objective of taming

inflation to a very large extent.

6.7. Impact on Government Revenue from Taxes

There is a positive relationship between the increase in tax receipts and the increasing share of

corporatized retail. Most retail transactions conducted in the 15 million shops of Independent retailers in

India are in cash. This provides a significant leeway for a parallel economy to thrive. There are tax (VAT)

leakages via under – invoicing or non – reportage of sales. The structure of independent retail also

provides enabling conditions for the trade of spurious and counterfeit goods. With an increasing share of


corporatized retail, the probability of such leakages would diminish leading to an increase in the certainty

of tax receipts which will provide the respective State Governments with extra revenue, which can be

better utilized in the development of other infrastructure.

Table: Tax Revenue from Retail

2001 2012 2021

Total Merchandise Retail (USD Bn) 120 490 810

Size of Organized Retail 4% 7% 20%

Size of Organized Retail (USD Bn) 5 34 162

Tax revenue @ weighted average tax rate of 10% (USD Bn) 0.5 3.4 16.2


7. Chapter 7 – SME sector’s viewpoint on impact of FDI policy in Retail

As per a survey conducted by CII (Confederation of Indian Industries) during December 2011 and

January 2012, on the impact of FDI on SME‘s, which was based on a large sample size of 250 companies

covering different categories of SME‘s according to sales turnover, from different regions of the country

including SME‘s with a turnover of

Rs. 25 Lakhs to Rs. 1 Crore

Rs. 1 Crore to Rs 5 Crore

Rs 5 crore to Rs. 25 Crore

Rs. 25 Crore and Rs. 100 Crore and above

The CII Survey confirmed that almost 96% of the respondents from the SME sector were aware of the

Government‘s earlier decision to allow 100% FDI in single brand retail and 51% FDI in multi-brand retail

and also of the latest notifications issued thereafter. The SME Industry, according to the survey, was in

favor of the government‘s decision to allow 51% Foreign Direct Investment (FDI) in multi-brand retail

and 100% in single brand retail.

A majority of the SME companies that were

surveyed, had supported the government‘s

decision and the notification allowing 100% FDI

in single brand retail and about 52% of

respondents were hoping for an early

implementation of 51% FDI in multi-brand

retail.

Fig: In favor of FDI in Multi Brand Retail

Source:CII Survey 2012


On the question how the SME industry

considered the entry of MNC retailers as a threat

or opportunity, majority of respondents (66.7%)

saw it as an opportunity for their sector while

around 21 % of respondents perceived it as a

threat. About 12.5 % of respondents were of the

opinion that the decision would have little or no

impact on their company.

Fig: Entry of MNC Retailers – Opportunity or Threat


The CII survey also tried to find out and make an assessment of the impact of the opening of FDI in retail

on SME‘s in terms of different growth indicators / parameters like sales, size of the industry / capacity

expansion, employment, branding and achieving other efficiencies: -

7.1. Impact on Sales

Majority of the respondents (93.7 %) were of the opinion that, opening of the FDI in retail will result in

growth of sales of their products. Of them, around 21% respondents believed that the impact on the

growth of sales of their product would be in excellent range (> 20%), 31% of the respondents perceived

the impact on growth of sales to be in the high range (10 – 20%), 33 % expected it to be in a moderate

range (5 – 10 %), 8 % felt the growth to remain in a low range (0 – 5%) and the balance 6 % felt that the

decision would have a negative impact on the growth of sales of their products.

Fig: Growth in sales of product



7.2. Impact on Size of Industry, Business / Capacity Addition

On the aspect of the possible impact on the size of the industry, business and capacity addition, majority

of the respondents (97.9 %) expected the size of their Industry / company to grow with the opening of

FDI in multi – brand retail and single – brand retail. Around 22.9% of the respondents perceived that their

industry would grow by an excellent rate (> 20%), 25% of the respondents expected the impact to be in

the high range (10 – 20%), while 33% expected the growth to be in the moderate range (5 – 10%), and

22% felt the growth to be in the low range (0 – 5%). A significantly negligible 2% of the respondents felt

that the decision would have a negative impact on the growth of size of their industry and business.

Fig: Growth in size of Industry, Business / Capacity Addition


7.3. Impact on New Orders / Contracts

Majority of respondents (95.8%) were of the opinion that the decision of opening of the FDI in retail

would impact them positively in the form of new orders / contracts generated. Around 31% of

respondents expected the new orders and contracts to grow substantially with more than excellent rate

(>20 %), 27% expected the impact to be in the high range (10 – 20%), while 31% expected it to be in the

moderate range (5 – 10 %). Around 6% perceived the growth to be in a low range (0 – 5%), however 4 %

felt that the decision would have a negative impact on the growth of size of the industry in terms of new

orders and contracts.


Fig: Growth in New Orders / Contracts


7.4. Impact on Qualitative improvements and branding of products

On the condition of mandatory sourcing of 30% from the SME Sector, over 56 % of the respondents were

of the view that the government‘s decision will help in achieving qualitative improvements and branding

of their products. This in turn, will ensure SMEs in receiving a sure source of market and higher value

realization for their products / supplies. It will also provide for expansion of their scales of production,

facilitating domestic value addition in manufacturing, thereby creating a multiplier effect on employment,

technology up gradation, income generation, demand and further investment.

7.5. Impact on Supply Chain efficiencies

Around 68% of the respondents surveyed, were of the opinion that

the opening up of retail would lead to improvements in the supply

chain efficiency within their sector, which in turn will integrate

small and medium size enterprises with the modern trade process,

resulting in substantial amount of knowledge and skill transfers in

the sector. However, 17% believed that there would be no impact,

and 15% were not sure if the decision could have any impact on

the supply chain at all.

Fig: Improvement in Supply Chain




Around 48% of the respondents were of the opinion that the

decision would have a positive impact on the employment in their

sector whereas 35% expected no change in the scenario. Around

16% believed the impact on the employment in the SME sector to

be negative.

Fig: Impact on Employment


8. Chapter 8 – Analysis of Current Entry Structure in line with FDI Policy Regulations

Many global retailers like Walmart, Metro, Ikea, Carrefour, Woolworth, Staples, etc which have been

wanting to establish and capture some market share in India are now trying to leverage on the policy of

100% in cash and carry wholesale and 51% in multi-brand retailing. Similarly retailers like Debanham,

Espirit, Nokia, Zara, Mark & Spencer, Hamleys etc. are leveraging policies based on single brand

retailing model. Significant foreign retailers‘ presence is seen in Apparel, Fashion, Luxury and food

retailing using either the franchise or licensing route.

Recently many global players like Amazon, Groupon, etc are taking advantage of online retailing and

hence are targeting Indian consumer by setting up relationship with supply chain companies to deliver

products to end customer therefore bypassing the need to create physical retail stores. To target Indian

consumer, identical efforts are expected by other leading global retailing giants leveraging on 3G and

smart phone apps, spreading virally on internet, and social networking platforms.

8.1. Entry structure for Foreign Retailers

India now provides an opportunity for retailers seeking to make investment in the emerging economies to

participate in the growth and increase their global presence. The nascent stage of organized retail

penetration in India and the shortage of availability of cash for expansion will prompt more business

activity in the sector.


Fig: FDI entry options in Retail at a glance

Source:BMR, Taxand 2012

Retail sector requires significant capital investment. However, currently viable funding is not easily

accessible

Suggested modes of FDI involvement would be in the following formats:

Equity: Likely to be the main source of funding Indian operations

Offshore Debt / External Commercial Borrowings:

Regulatory restrictions on end-use of foreign borrowings will pose a severe challenge.

Foreign debt has also not been permitted in single-brand retail model

However, Offshore debt may be possible for multi-brand retail companies for establishment

of cold storage and warehousing facilities

Hybrid Securities: Some ‗hybrid securities‘ which are classified as ‗equity‘ from a regulatory

perspective will form an interesting format for FDI participation. Formats like CCD‘s, FCD‘s

(fully and compulsorily convertible preference shares and convertible debentures) will become a

major source of bringing Foreign money into India.


Ever since the policy on single brand retail policy was announced in 2006, more than 60 brands have set

up retail operations in India in strategic joint ventures with Indian partners.

Some of these include:

Brand JV Parner Brand JV Partner

Marks & Spencer Reliance Retail Georgia Armani DLF

Fendi Chordia Fashions Ferragamo DLF

Damas Gitanjali Lifestyle Inditex (Zara) Trent

Burberrey Genesis Color S Oliver Orient Craft

Source:PWC, FICCI 2012

Some of the other deals announced recently:

Investor Investee Sector

SAIF Ventures Ink Fruit Online apparel site

Tiger Capital, Helion

Ventures, Accel India

Letsbuy.com Online consumer durables site

Fidelity Big shoe bazaar India Online shoe site for wholesale purchases

Tiger Capital CaratLane.com Online jewellery site

Sequoia Capital India Lovable Lingerie Innerwear

Standard Chartered PE Privi Organics Indian aroma chemical products manufacturer

Source:PWC, FICCI 2012

Acquirer Target Year Deal Type

Future Venture India Ltd Big Apple (Convenience Stores) Sep 2012 Acquisition

Peter England Ltd Pantaloons Retail India Ltd Sep 2012 Acquisition

Pantaloons Retail India Ltd R & R Salons May 2012 Private Equity

Phoenix Mills Ltd Classic Housing Projects Pvt. Ltd. Mar 2012 Acquisition

Flipkart Online Services Pvt. Ltd. eTree Marketing Pvt. Ltd. Feb 2012 Acquisition

Gitanjali Gems Ltd Crown Aim, China Dec 2011 Acquisition

Shopper Stop Ltd Gateway Multichannel Retail India Nov 2011 Acquisition

TTK Prestige Ltd Triveni Bialetti Pvt. Ltd. Sep 2011 Acquisition

TV 18 On – Graph Technologies Pvt. Ltd. Jul 2011 Acquisition

Pantaloons Retail India Ltd Home Solutions Retail (India) Ltd Aug 2010 Acquisition

Shoppers Stop Ltd HyperCITY Retail India Pvt. Ltd. June 2010 Acquisition

TPG Capital, Bain Capital Lilliput Kids wear Ltd. Apr 2010 Private Equity

Source:IBEF 2013


8.2. FDI policy regulations for Single Brand Retail Trading (SBRT) – an analysis


8.3. FDI policy regulations for Multi Brand Retail Trading (MBRT) – an analysis

Policy Requirements Impact

Issue Policy Requirements Impact

Ownership of

the ‗brand‘

Investor entity need not be the owner of

the brand

Copy of licensing / franchise / sub-

license agreement required to be

furnished by investing entity at the time

of seeking approval

Amendment recognizes IP holding

structures established by retail

companies

Provides opportunity to use

investment holding company

structures in SBRT

Investment by Private equity /

financial investors (other than FIIs)

Concept of

‗single brand‘

Inclusion of sub-brands/ differentiated

brands/ variants of brands

All brands should be retailed together in

one or more country outside India

Products should be branded during

manufacturing

All product/product categories to be

sold in India need to be specifically

mentioned and approved

Brands owned by a separate legal

entity, cannot be consolidated in

single store

Any addition to product categories

would require approval

Mandatory

sourcing of

30% products

from India in

case of FDI

beyond 51%

In case of FDI beyond 51%, sourcing of

30% of value of the goods purchased, to

be done from India, preferably from

MSMEs, village, cottage industries,

artisans and craftsmen, in all sectors

Condition to be met by the approved

retail trading entity

Condition would have to be met in the

first instance basis average of five

years; thereafter, to be met on an annual

basis

Quantum of domestic sourcing to be

self-certified by company (validated by

auditors)

Offers flexibility to foreign retailers

for sourcing products

May still be a deterrent for foreign

investment in trading of high-end

technology niche products

Existing tie-ups for sourcing built

by various foreign companies in

India – whether to continue or

remodel?

Whether products purchased locally

should be exported or retailed in

India? – needs fact based analysis


Minimum investment – US$ 100 million

At least 50% of total FDI to be invested in

backend infrastructure

Mechanics to compute minimum investment in

case of investment at premium or in case of

acquisition will pose a question

Specialty stores may not be able to meet

minimum investment cap

Unbundling of back end infrastructure to a

group entity would pose difficulty

Sales outlets can be set up only in the States

that agree to allow FDI in MBRT

Can only be opened only in cities with

population of more than 1 million (only 53

cities as per 2011 census)

Investor can‘t have pan India presence due to

varied state policies / political circumstances

Need for developing an appropriate legal and

operational structure

Significance of cash and carry wholesale

trading model to continue – however

transactions with retail entity may be subject to

scrutiny from a policy perspective

Risk of future retroactive change in policy by

the Government – could be viewed as breach of

bilateral investment protection agreements and

constitutional laws

At least 30% of the value of products to be

sourced from Indian 'small industries‘

Small industries defined to include industries

having total investment in plant & machinery

not exceeding US$ 1 million

Establishing compliance with this condition

would be onerous and would require a robust

data capture process

Potential hindrance to building economies of

scale


8.4. Impact of regulation – Minimum investment of USD 100 Million

Under the revised FDI policy for multi – brand

retail, it has been proposed that a minimum

investment of USD 100 million is to be brought in

by the foreign entity with a constraint to obtain a

maximum stake of 51% in the Indian Joint venture.

This condition acts as a barrier for entry to the

foreign retailer, as it implies that the minimum

investment required by both, the foreign and the

Indian partner together, will be more than INR

1200 Cr. (considering 1 USD = INR 60).

Fig: Snapshot of major retailers in 2010-11

Segment Existing

Player

Revenue

(INR Cr)

Stores

Apparel Pantaloon 4097 >65

Shoppers Stop 1927 >50

Westside 821 >60

Mass Grocery Big Bazaar 6914 >210

Reliance Fresh 7599 >400

Beauty &

Wellness

Apollo 860 >1350

Tata Eye+ 328 >200



Mass Grocery and Apparel, which are two of the fastest growing organized retail segments where there

exist large domestic retailers, could be the potential segments for joint ventures with foreign retailers.

However, other segments like will not tend to benefit much from this condition.

8.5. Impact of regulation – 50% of FDI to be invested in backend infrastructure in 3 years

Minimum investment of 50% of total FDI (say more than INR 300 Cr) is to be invested in backend

infrastructure in the first three years of the first tranche of the investment.

Different retail segments have dynamic requirements of backend infrastructure. Mass Grocery needs

significant investment in the backend. (For example food processing unit, cold chains, etc.)

However, other segments such as Apparel, Beauty & Wellness and Consumer Electronics have limited

requirements in the backend. Further, as per the policy, land cost and rentals that might be incurred for

warehousing are not included in the definition of backend infrastructure.

Hence, meeting this policy constraint would be a challenge for any player in the retail segment other than

Mass Grocery.

Fig: Backend Infrastructure of major Retail segments

Manufacturing Warehousing IT Logistics

Apparel Do not have their

own manufacturing

units

Own warehouses in

different regions of

India

Possess IT

infrastructure for

Inventory

Management

Outsourced to third

parties

Mass

Grocery

Many existing retail

chains own

processing centers for

private label brands

Own distribution

centers with cross

dock facility and cold

chains etc

Possess IT

infrastructure for

Inventory

Management

Own subsidiaries for their

logistics (For example

Future Supply chain and

Reliance Supply)

Beauty &

Wellness

Do not own

manufacturing units,

except few stores

such as eyewear

Own warehouses in


India

Companies have

centralized database

management

Outsourced to third

parties

Consumer

Electronics

Some products of

other manufacturers

Own warehouses in


India

Possess IT

infrastructure for

Inventory

Management

Either outsourced or

company owned


8.6. Impact of regulation – 30% of sourcing from ‗small‘ industries

This policy constraint implies that retailers should have at least 30% sales from private label brands or

unbranded products sourced from small industries. Existing Mass Grocery retailers in India source many


products directly from producers and ‗small‘ food processing units. However, suppliers of Consumer

Electronic and other specialty stores such as Beauty & Wellness are large size companies.

Fig: Sourcing Practices of major Retail segments

Segment Current sourcing practices

Apparel Private label apparels – Retailers source fabric and supply them to contract

manufacturers of purchase finished garments from low cost suppliers

Other accessories or Non apparel accessories like wallets, handbags, etc are

becoming a significant part of total sales for apparel retailers

Mass Grocery Increasingly, companies are stressing on a private label portfolio in both grocery and

non – grocery retailing because of the high margins (for example, private label

constitute approx 25% of total products for Spencer‘s)

Companies are sourcing directly from producers to economize on the price and

increase margins (for example Pantaloon‘s retail subsidiary – Future Fresh Foods

Limited sources directly from producers)

Beauty & Wellness Retail chains such as Apollo & Guardian have private label brands (Guardian has

more than 220 SKU‘s) which offer higher margins

For most OTC medicines, prescription based medicines and beauty products,

retailers source from large pharmaceutical companies

Consumer

Electronics Retailers source electronic products directly from the manufacturers and distributors

appointed by manufacturers or wholesalers

Even in case of private label brands, majority sourcing happens through foreign

shores Source: Deloitte 2013

8.7. Impact of regulation – Only cities with population more than one million

Only 53 cities in India qualify under this policy

condition. This policy constraint restricts the

access to retail market in all sub – one million

populated cities and towns. More than 80 per

cent of stores of various multi – brand retail

chains (such as Spencer, Spar, Shoppers Stop,

Croma, Titan Eye+ etc.) are in cities with more

than one million population. Hence, the policy

condition may not significantly affect

operations in most of the retail segments.

Fig: Retailers with stores in cities with population > 1 Mn


8.8. Impact of regulation – Approval from State Government required

There are only 18 cities in India with population

more than one million and the corresponding State

Fig: Retailers with stores in states supporting FDI


Government supporting FDI in multi – brand.

More than 50% of the existing retailer stores (such

as Spencer, Shoppers Stop, Lifestyle, Apollo etc.)

are in states not supporting FDI in multi – brand.

This policy condition impacts the access to a

significant market. Further, limited cities means

limited stores and reduces economy of scale.


8.9. Impact of regulation – E-commerce not permissible

Multi-brand retailers with FDI will not be able to

use e-commerce, whereas, Indian retailers can use

e-commerce as another channel for sales. Most of

the existing retailers in Mass Grocery and multi-

brand Apparel do not use e-commerce to sell their

products. Even in specialty retailers such as

Beauty & Wellness, e-commerce does not form a

significant part of their sales. Hence, this policy

constraint should not materially impact

operations.

Fig: Retailers using e – commerce


9. Chapter 9 – Key challenges for International Players

Challenge Description

Execution Challenges The advent of FDI policy of September 2012 can pave the way for

modernization of the Indian retail sector, however, the journey ahead is

challenging. Even well heeled MNC retailers will have to pay heed to the Indian

political, social and competitive landscape, if they want to succeed in the Indian

retail sector.

Availability of Retail Space Hypermarkets require more than 60,000 sq. ft. and departmental stores require

more than 20,000 sq. ft. of retail space. Such retail space in prime locations in

the big cities is scarce and available only at high rental costs.


High rental cost The Indian retail rentals have been quoted to be around 300-400 basis points

higher than international rentals. Rents in prime properties have increased by 50

per cent in just three years. According to an industry estimate, rentals comprise

approx. 40 per cent of total cost of sales in the retail sector. Thus, successful

negotiation of rents would constitute a key success factor for MNC retailers

Clarification on certain policy

features

The policy note does not specify whether investment in back end infrastructure

needs to be a fresh investment or if foreign companies can buy stakes in already

established backend infrastructure.

Red Tape – Getting various

government approvals

Entry of a multi-brand MNC retailer in the retail sector would fall under the

approval route. This implies that the MNC retailer would have to go through

different layers of Government departments before getting the go ahead.

Political Risk The largest opposition party in India has opposed FDI in retail and some of its

leaders have indicated that they will scrap the policy if their party comes to

power. A political change in state and central governments puts a lot of political

risk on investment in retail.

Skilled Manpower One of the major challenges faced by the existing players is the availability of

skilled manpower; any foreign retailer planning to enter India will have to face

similar challenges

Infrastructure Challenge Roads, ports, electricity are some of the infrastructure challenges, which

increase the operational cost of the retail chain.

Currency Fluctuation In the past three months, the dollar/INR exchange rate has fluctuated by approx.

8 per cent. This may put considerable currency risk on any foreign investment in

India.

Way ahead for international

retailer

MNC players need to take cognizance of a host of consumer behavioral issues

and policy implications before deciding on their foray into the Indian retail

market.

Right Partner The success of the business will be heavily influenced by the choice of partner.

International players should partner with players who will help them reach the

end customers and possess lucrative front-end retail infrastructure. An

established player in the retail market will help bring in customers while the

foreign player can used its expertise in supply chain and logistics to further

enhance the operational efficiency.

Repatriation strategy

Foreign capital invested in India is generally allowed to be repatriated along

with capital appreciation, if any, after payment of tax dues on them, subject to

other tax and regulatory conditions. Hence, in formalizing a strategy to achieve

a tax efficient repatriation, the following aspects/options could be examined in

detail:

Review of

Financial Model

Review of financial model from a tax perspective

to eliminate any tax inefficiencies

Review of Royalty

agreements

In the case of Joint Venture (JV) arrangements for

investing in India, review of royalty agreements, if

any, from a tax perspective

Suggesting effective tax planning opportunities so

as to minimize tax exposures, if any

Analyzing the transactions from tax perspective

and complying with the Transfer Pricing (TP)

requirements

Jurisdiction

Analysis

Jurisdiction Analysis for tax efficient investing

Analyzing/following alternatives for structuring


investments in India:

Direct investment in India; or

Investment through an Intermediate

Holding Company

Analyzing mechanism for up-streaming income

and alternative exit strategies for repatriation of

capital and profits in tax-efficient manner

Transfer Pricing

Planning &

Analysis

Transfer Pricing planning and analysis for

facilitating arm‘s length transactions and proper

documentation

Indirect taxation Indirect taxes play a very important role in

deciding the costing and consequently, the pricing

model in a supply chain.

10. Chapter 10 – SWOT Analysis

Strengths

Weakness

Will boost economic development

Young and dynamic human resource to take the

challenge

Will provide better opportunity to farmers,

small retailers, local artisans

Potential for high growth rate in retail and

wholesale trade in India

Presence of big business / industry houses

which can absorb losses

Highly unorganized sector with Low capital

investment

Lack of trained and educated force

Lack of competition

Poor infrastructure

Heavy wastage due to non availability of

sufficient warehouses and cold storage

facilities

Opportunity

Threats

Scope for major employment generation in

future

Will improve the financial conditions of

farmers

Will add to retailer‘s efficiency

Foreign capital inflows to the country

Will lead to big markets with better technology

and branding

Quality improvements with cost reduction

Increasing the export capacity

Increase in lifestyle changes and status

consciousness

Some Kirana and mom & pop retailers may

lose business in long run

Fear of controlling the retail sector by foreign

investors / Big stores, as seen in some countries

FDI in multiband retail may result in job losses

in manufacturing sector

Roadside bargains may start which may harm

the farmers

Farmers can face exploitation and lose their

fields and crops to larger foreign investors if

not prevented


11. Chapter 11 – Conclusion

We have critically analyzed above that the advent of FDI in Retail is expected to benefit our country in

many ways. A few of them have been summarized below:

Organized retail sector will grow from current 8% to over 20% by 2015, contributing more than USD

160 Bn to the Indian Retail sector

This will lead to investment worth billions of Dollars in the Indian economy

Food & Grocery segment will attract a higher share of FDI inflows (in value), benefiting from scale,

and leading to technology and back – end infrastructure up gradation

Other segments like fashion apparel, beauty and wellness, consumer durables, etc will also benefit

Giant global retailers will add competition to the market, however, considering the vastness and

diversity in India, they will pose very little threat to Traditional Retail

Knowledge and Information flow from Global retailers, due to their diverse experience, will

immensely benefit Indian retailers

Capital investment expected to be made in backend infrastructure will address present problems of

inadequate infrastructure, inefficient supply chain, involvement of multiple middlemen, increased

wastage, and higher cost

Investments in technology and introduction of best management practices by Global retail giants will

ensure enhancement of productivity

Farmer realizations will inadvertently improve due to reduction in crop wastage, direct sourcing and

better supply chain efficiencies

Local and small scale manufacturers and artisans falling under the definition of ―small‖ industries

will benefit by the policy regulation of mandatory sourcing

Consumers will benefit having a wider and world class shopping opportunity, with lower prices due

to optimum utilization of producer surplus, and increase in competition

The continuous problem of rising inflation is expected to come under control

Retail sector in India which is estimated to be amongst the top 5 employers after agriculture, will get

a tremendous boost by participation of Global Companies, searching for the right talent

New skill set of ‗retail jobs‘ will be added to the current employment scenario. Professional institutes

will introduce specialized post graduate degrees in retail management.


Apart from specific skill category, the sector will demand huge resource base from managerial,

operational, and other fields leading to a huge opportunity for employment

The Governments will benefit by collecting taxes, which have been missing due to the nature of the

unorganized sector, leading to extra revenues that can be spent on developing better infrastructure,

and other facilities

Though the benefits of FDI in retail are expected to be many, however, the topic has been subjected to

fierce political debates and controversies, leading to only 9 states presently agreeing to accept the policy.

The policy introduced, has not been very well appreciated by the Global retail community, finding the

regulations to be extremely tough and not well structured. For a policy that has taken years to be

introduced, a better and more pragmatic approach could have led to a higher acceptance level.

Considering the sector to be relatively nascent, we are hopeful, that the years to come will pave way for

developing the sector into a major contributor to the country‘s growth.

12. Chapter 12 – References

Sno. Title

1. India Retail Market, Opening more doors – January 2013 by Deloitte Consulting Group

2. India Retail Sector Report – 2013 by Michael Page Retail

3. Report Retail – March 2013 by IBEF (India Brand Equity Foundation)

4. FDI in Retail in India: An Empirical Analysis, March 2013, by Pankaj Sinha & Anushree Singhal

5. FDI in Retail: An Objective Assessment of FDI‘s impact on the Indian Retail Sector and the Indian

Economy, October 2012, by Technopak Advisors

6. Foreign Direct Investment in India‘s Single and Multi-Brand Retail: New Opportunities &

Developments, October 2012, by Sannam S4 & BDO Advisors

7. The Indian Kaleidoscope: Emerging trends in Retail, September 2012, by FICCI & PWC

8. FDI in Retail, Advantage Farmers – October 2012 by Assocham & Yes Bank

9. Understanding India‘s new policy on FDI in retail – October 2012, by BMR Advisors

10. Impact of FDI in Retail on SME Sector, a survey report by CII (Confederation of Indian Industry)

11. FDI in Multi-brand Retailing: Lessons from China – 2012, by Kaanan Gupta, CCS Working Paper No.

258 Non Summer Research Internship Program 2012 Centre for Civil Society

12. Foreign Direct Investment in Indian Retail Sector Pros and Cons – 2012, by K.R. Kaushik, Dr. Kapil

Kumar Bansal, International Journal of Emerging Research in Management & Technology

13. Indian Retail Sector – March 2011, Resurgent India

14. India Retail Report 2013, Images Group

15. News Papers: Economic Times, Business Standard, Financial Express

16. Magazines: Retailer, Franchise India, Estate Avenues

17. Websites for reference: www.indiaretail.com, www.wikipedia.org, www.deloitte.com/in,

www.michaelpage.co.in, www.ibef.org, http://mpra.ub.uni-muenchen.de/, www.assocham.org,

www.bmradvisors.com, http://cii.in/, www.ccs.in

http://www.indiaretail.com/

http://www.wikipedia.org/

http://www.deloitte.com/in

http://www.michaelpage.co.in/

http://www.ibef.org/

http://mpra.ub.uni-muenchen.de/

http://www.assocham.org/arb/general/Background-FDI-Retail.pdf

http://www.bmradvisors.com/

http://cii.in/WebCMS/Upload/IMPACTOFFDIINRETAILONSMESECTORSurvey.pdf

http://www.ccs.in/

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