RETAIL IN INDIA by ambarish1987

VIEWS: 329 PAGES: 42

									Foreign Direct Investment in Retail

February 23, 2004

Agenda
Retailing : An overview Indian retail

The change factor
FDI in Indian retailing

Why FDI ?
How FDI ? Case study : Chinese retail

Recommendations

2

Agenda
Retailing : An overview Indian retail

The change factor
FDI in Indian retailing

Why FDI ?
How FDI ? Case study : Chinese retail

Recommendations

3

Retailing: An overview


Retailing  World’s 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


An overview

Wal-Mart  Topmost global Fortune 500 company(3 Consecutive Years)  Annual Sales of over US$ 250 bn  India’s 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’



*Fortune List of world’s top companies **Euromonitor 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

6

Evolution of Indian retail
Historic/Rural Reach Traditional/Pervasiv e Reach Government Supported Modern Formats/ International

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 Neighborhood Stores/Convenience Availability/ Low Costs / Distribution Shopping Experience/Efficiency

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Evolution of Indian retail


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

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Categories of Indian retail


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

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Classifying Indian retail


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

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Large Indian retailers


Hypermarket
  



Big Bazaar Giants Shoprite Star Lifestyle Pantaloons Piramyds Shoppers Stop Trent Fame Adlabs Fun Republic Inox PVR



Department store
    

Indian retailers



Entertainment
   

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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

12

The changing Indian consumer


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

†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





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*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



Industry dynamics


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



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Real estate issues


RE 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

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Growth factors



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

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The Indian advantage


Advantage India

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



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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

20

FDI in Indian retailing


FDI in Retail not permitted

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)

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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 pre1997  Foodworld  51:49 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


How they are present



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

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International retailers in India: Strategies


How they are present


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

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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

25

Why FDI?
  

Benefits of 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

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Why FDI?


Investment in technology
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

Benefits of FDI

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Cold storage chains solve the perennial problem of wastage Greater investment in the food processing sector technology Better operations in production cycle and distribution 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



Better lifestyle
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   

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Why FDI?


Manpower and skill development
 

Through retail training and Greater managerial talent inflow from other countries A strong retailing sector boosts tourism as seen from the experience of Singapore and Dubai



Tourism Development
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Benefits of FDI
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Investment in whole supply chain
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Improved product basket from India for exports
Up-gradation of agriculture Development of efficient small and medium size industries

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Long term benefits
 

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Benefits to the government

Greater Per Capita Income

Greater Consumer Spending due to economic boom GDP Growth

Employ Benefits Greater ment to Govt. Exports Increasing Tax Paying Population Increased Tax Revenues Greater Sourcing From India

Reduced Tax Evasion

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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


Benefits to govt.

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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
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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

31

How FDI ?


FDI should be allowed in stages  Initial stages: 26% FDI


2 yrs

Establishment Phase: 49% FDI
Mature Phase: 100% FDI

2 yrs
2 yrs



How 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

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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

33

Case study : Chinese retailing


FDI permitted in 1992. 40 foreign retailers have secured approval  Retail sales have grown@13.5% CAGR since FDI was permitted FDI initially restricted to 6 major cities (including Beijing, Shanghai and Guangzhou) and SEZs



Chinese retailing


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





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Total wholesale and retail trade

375
300
US$ bn

225 150 75
FDI in retail allowed

7 8

8 0

8 5

9 0

9 1

9 2

9 3

9 4

9 5

9 6

9 7

9 8

9 9

0 0

0 1

0 2

Years


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

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China: The effect of FDI
Type Traditional Supermarkets Convenience Hypermarkets No. of stores in 1996 1,920,604 13,079 No. of stores in 2001 2,565,028 152,194 18,091 593

 

Modern formats have grown after FDI But so have traditional players

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Employment in retailing is increasing
Employment in Retailing
60
Em ploym ent in Retail and w holesale (M n)
8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 90 91 92 93 94 95 96 97 98 99 00 01 Y ear Employment %

50 40 30 20 10 0

Source : China Statistical Yearbook 2001
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% of Total Labor force

Case study : Chinese retailing


Walmart  Entered Chinese market in 1996  Has 43 stores in 19 cities as on date


Chinese retailing


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*

Source : company websites
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Lessons from China


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

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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

40

Recommendations
   

Recommenda tions



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

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THANK YOU

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