Foreign Direct Investment in Retail

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Foreign Direct Investment in Retail

• February 23, 2004

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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
3
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
4
Retailing An overview

• Retailing
• Worlds largest private industry
• US 6.6 trillion sales annually
• Indian retailing
• Largest employer after agriculture - 8 of
  population
• Highest outlet density in world
• Around 12 mn outlets
• Still evolving as an industry
• Long way to go

An overview
www.etretailbiz.com/dec2002
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Retailing An overview

• Wal-Mart
• Topmost global Fortune 500 company(3 Consecutive
  Years)
• Annual Sales of over US 250 bn
• Indias two largest retail player turnover around
  US 158 mn (Bata) and US 102 mn (Shoppers Stop)
• Fortune 100
• 9 Retailers
• Carrefour, Ahold, Home Depot, Kroger, Metro,
  Kmart-Sears, Target, Albertsons

An overview
Fortune List of worlds top companies Euromoni
tor India Retail Survey
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
7
Evolution of Indian retail
Modern Formats/ International
Traditional/Pervasive Reach
Government Supported
Historic/Rural Reach
Exclusive Brand Outlets Hyper/Super
Markets Department Stores Shopping Malls
PDS Outlets Khadi Stores Cooperatives
Convenience Stores Mom and Pop/Kiranas
Weekly Markets Village Fairs Melas
Source of Entertainment
Availability/ Low Costs / Distribution
Shopping Experience/Efficiency
Neighborhood Stores/Convenience
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Evolution of Indian retail

• Informal retailing Sector
• Typically small retailers.
• Evasion of taxes
• Difficulty in enforcing tax collection
  mechanisms
• No monitoring of labor laws
• Formal Retailing Sector
• Typically large retailers
• Greater enforcement of taxation mechanisms
• High level of labor usage monitoring

Indian retail
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Categories of Indian retail

• Corporate Houses
• Tatas Tata Trent
• RPG group Food World, Health and Glow, etc
• ITC Wills Life Style
• Rahejas(ShoppersStop), Hiranandani(Haiko),
  DLF(DT cinemas) etc.
• Dedicated brand outlets
• Nike, Reebok, Zodiac etc
• Multi-brand outlets
• Vijay Sales, Viveks etc
• Manufacturers/ Exporters
• Pantaloons, Bata, Weekender

Indian retail
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Classifying Indian retail

• Modern Format retailers
• Supermarkets (Foodworld)
• Hypermarkets (Big Bazaar)
• Department Stores (S Stop)
• Specialty Chains (Ikea)
• Company Owned Company Operated
• Traditional Format Retailers
• Kiranas Traditional Mom and Pop Stores
• Kiosks
• Street Markets
• Exclusive /Multiple Brand Outlets

Indian retail
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Large Indian retailers

• Hypermarket
• Big Bazaar
• Giants
• Shoprite
• Star
• Department store
• Lifestyle
• Pantaloons
• Piramyds
• Shoppers Stop
• Trent
• Entertainment
• Fame Adlabs
• Fun Republic
• Inox
• PVR

Indian retailers
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
13
The changing Indian consumer

• Greater per capita income
• Increase in disposable income of middle class
  households
• 20.9 growth in real disposable income in
  99-03.
• Growing high and middle income population
• Growing at a pace of over 10 per annum over
  last decade
• Affordability growth
• Falling interest rates
• Easier consumer credit
• Greater variety and quality at all price points

Indian consumer
From Euromonitor Retail Survey
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The changing Indian consumer

• The urban consumer
• Getting exposed to international lifestyles
• Inclined to acquiring asset
• More discerning and demanding than ever
• No longer need-based shopping
• Shopping is a family experience
• Changing Mindset
• Increasing tendency to spend
• Post Liberalization children coming of age
• 100 mn 17-21 year olds. Tend to spend freely.
• Greater levels of education

Indian consumer
Data from NCAER
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Anticipated growth

• Market size
• Current market size is roughly US 286 bn
• 96 of the 12 Million stores are less than 500
  Sq. ft.
• Forecast Growth rate for the retailing industry
  is roughly 8.3 for 2003-2008
• Sales from large format stores would rise by
  24-49
• Formal and modern format retailing would enjoy
  rapid growth

Anticipated growth
From ICICI Retail Report From Euromonitor
Retail Survey
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Industry dynamics

• Low domestic competition
• Because of fragmented nature of industry
• Lack of exposure to global best practices
• Low entry barriers for unorganized retailing
• Moderate entry barriers for organized retailing
• Wholesale system under-invested leading to 20-40
  wastage
• Non level playing field issues
• Wide differences in treatment of small and large
  retailers

Industry dynamics
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Real estate issues

• Highly distorted real estate market
• Pro-tenant laws
• Zoning laws
• Zoning laws also vary from state to state
• Non-availability of government land, and
  fragmented private holdings makes it difficult
  for retailers to acquire land
• Government is largest property owner in country
• Urban Land Ceiling act is archaic
• Stamp Duty and registration charges at high
  levels. Also vary from state to state

RE issues
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Growth factors

• Growth determining factors
• Government Policy
• Infrastructure development
• GDP growth
• Employment generation and job creation
• In several new sunrise industries
• Implies greater purchasing power

Growth factors
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The Indian advantage

• India ranked 5th in the Global A.T Kearney Retail
  Development Index
• Second only to China in Asia
• Least saturated of all global markets studied
• The least competitive of all global markets
  studied
• Implies lower barriers of entry for global
  players
• Considering tremendous market size, excellent
  potential for foreign players
• India ranked 3rd in the Global A T Kearney FDI
  Confidence Index in 2004
• Improved from Rank 6 in Year 2003

Advantage India
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
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FDI in Indian retailing

• Current Indian FDI Regime
• FDI not permitted in retail trade sector, except
  in
• Private labels
• Hi-Tech items / items requiring specialized
  after sales service
• Medical and diagnostic items
• Items sourced from the Indian small sector
  (manufactured with technology provided by the
  foreign collaborator)
• For 2 year test marketing (simultaneous
  commencement of investment in manufacturing
  facility required)

FDI in Retail not permitted
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FDI in Indian retailing

• Metro Group of Germany
• Cash-and-carry wholesale trading
• Proposal faced strong opposition
• Entities established prior to 1997
• Allowed to continue with their existing foreign
  equity components.
• No FDI restrictions in the retail sector pre-1997
  
• Foodworld
• 5149 JV between RPG and Dairy Farm
  International,
• Leading food retailer in India now
• Mc Donalds

Current FDI
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International retailers in India Strategies

• Franchise
• International company gives name and technology
  to local partner. Gets royalty in return
• In case master franchise is appointed for region
  or country, he has right to appoint local
  franchisees
• Nike, Pizza Hut, Tommy Hilfiger, Marks and
  Spencer, Mango
• Manufacturing
• Company sets up Indian arm for production
• Bata India. It also has right to retail in India

How they are present
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International retailers in India Strategies

• Distribution
• International company sets up local distribution
  office
• Supply products to Indian retailers to sell
• Also set up franchised outlets for brand
• Swarovski, Hugo Boss
• Wholesale trading
• Cash and Carry operations
• 100 FDI permitted
• Metro Cash n Carry

How they are present
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Agenda
Retailing An overview
Indian retail
FDI in Indian retailing
Why FDI ?
How FDI ?
Incentives for FDI
Case study Chinese retail
Recommendations
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Why FDI?

• Improve competition
• Develop the market
• Greater level of exports due to increased
  sourcing by major players
• Sourcing by Wal-Mart from China improved
  multifold after FDI permitted in China
• Similar increase in sourcing observed for Metro
  in India
• Provides access to global markets for Indian
  producers

Benefits of FDI
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Why FDI?

• Investment in technology
• Cold storage chains solve the perennial problem
  of wastage
• Greater investment in the food processing sector
  technology
• Better operations in production cycle and
  distribution
• Better lifestyle
• Greater level of wages paid by international
  players usually
• More product variety
• Newer product categories
• Economies of scale to help lower consumer price
• Increased purchasing capacity of consumers

Benefits of FDI
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Why FDI?

• Manpower and skill development
• Through retail training and
• Greater managerial talent inflow from other
  countries
• Tourism Development
• A strong retailing sector boosts tourism as seen
  from the experience of Singapore and Dubai
• Investment in whole supply chain
• Improved product basket from India for exports
• Long term benefits
• Up-gradation of agriculture
• Development of efficient small and medium size
  industries

Benefits of FDI
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Benefits to the government
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Benefits to the government

• Increase employment levels
• FDI would result in market growth and expansion
• Employment generated at various levels
• Increased consumer demand implies employment
  generation across the value chain
• Does not need very high skill sets
• Needs high school graduates and other similar
  skill levels
• Currently this is a majorly unemployed
  demographic group
• Boom in employment
• Similar to job generation in ITES industry
• On a much larger scale
• But new jobs comparatively lower down the value
  chain

Benefits to govt.
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
32
How FDI ?

• FDI should be allowed in stages
• Initial stages 26 FDI
• Establishment Phase 49 FDI
• Mature Phase 100 FDI
• FDI policy
• No incentives needed to attract FDI
• Market size and potential are sufficient inducers
• No need for costly tax breaks, import duty
  exemptions, land and power subsidies, and other
  enticements

2 yrs
2 yrs
How FDI ?
2 yrs
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why and why not FDI ?
How FDI ?
Case study Chinese retailing
Recommendations
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Case study Chinese retailing

• FDI permitted in 1992. 40 foreign retailers have
  secured approval
• Retail sales have grown_at_13.5 CAGR since FDI was
  permitted
• FDI initially restricted to 6 major cities
  (including Beijing, Shanghai and Guangzhou) and
  SEZs
• Foreign ownership initially restricted to 49
• US 22 bn of FDI attracted, 3.6 of total FDI
• In 2003, FDI in wholesale and retail was US 1.1
  bn (Around 30 of our total FDI in 2003)
• Current restrictions on FDI will be phased out
  over 5 years as condition of WTO entry

Chinese retailing
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Total wholesale and retail trade
375
300
US bn
225
150
75
9 2
7 8
8 0
8 5
9 0
9 1
9 3
9 4
9 5
9 6
9 7
9 8
9 9
0 0
0 1
0 2
Years

• Retail sales grew _at_ 19.6 CAGR for the next 4
  years after the introduction of FDI in 1992

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China The effect of FDI

• Modern formats have grown after FDI
• But so have traditional players

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Employment in retailing is increasing
Source China Statistical Yearbook 2001
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Case study Chinese retailing

• Walmart
• Entered Chinese market in 1996
• Has 43 stores in 19 cities as on date
• Had sales of US 704 mn in 2003
• Has employed more than 20,000 people
• Has paid taxes of US 111 mn in total
• Carrefour
• Has 54 stores as on date
• Had sales of US 1.6 bn in 2003

Chinese retailing
Source company websites
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Lessons from China

• Strong evidence in favor of FDI
• FDI improves the entire size of the industry
• Retailing in China has grown at a compound rate
  of 15 per annum after FDI inflow
• Employment growth
• Evolution of modern formats
• Local players can survive and even beat foreign
  competition
• Need for a strong retailing industry in India
• Scale is the key to success for local retailers

Lessons from China
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Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
41
Recommendations

• Grant industry status to retail
• Permit FDI in Retail in phases
• Invest in supply chain infrastructure
• Ease distribution infrastructure creation,
  octroi
• Ensure single window clearance for retail chains
• Organize market for real estate
• Ensure proper rent laws
• Enforce zoning laws and city development plan
• Increase land supply
• Ensure flexibility of labor laws

Recommendations
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