TITLE

FDI in Retail - Advantage Farmers

AUTHORS

Food & Agribusiness Strategic Advisory and Research (FASAR) Team - YES BANK

YEAR

October 2012

COPYRIGHT

No part of this publication may be reproduced in any form by photo, photoprint, microfilm or any other means without the written permission of YES BANK Ltd. and ASSOCHAM.

DISCLAIMER

The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty expressed is made to their accuracy, completeness or correctness. This document is for information purpose only. The information contained in this document is published for the assistance of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This document is not intended to be a substitute for professional, technical or legal advice. All opinions expressed in this document are subject to change without notice. Neither YES BANK Ltd. nor ASSOCHAM or any other legal entities in the group to which it belongs, accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith.

CONTACT ADDRESS

YES BANK Ltd. Registered and Head Office 9th Floor, Nehru Centre, Dr. Annie Besant Road, Worli, Mumbai - 400 018, INDIA Tel : +91 22 6669 9000 Fax : +91 22 2497 4088 Northern Regional Office 48, Nyaya Marg, Chanakyapuri New Delhi - 110021 Tel : +91 11 6656 9000 Email : fasar@yesbank.in

Mr. D. S. Rawat Secretary General The Associated Chambers of Commerce and Industry of India ASSOCHAM Corporate Office, 1, Community Centre Zamrudpur, Kailash Colony, New Delhi 110 048 Tel : +91 11 4655 0555 Fax : +91 11 4653 6481/82 Email : d.s.rawat@assocham.com Website : www.assocham.org

MESSAGE

ASSOCHAM, India's Apex Chamber for Commerce and Industry, welcomes the announcement of 51% Foreign Direct Investment (FDI) in Multi-Brand Retail in India.

M e s s a g e

We at ASSOCHAM have launched a campaign across the country to spread awareness at the grass-roots level, that FDI is a blessing which would lead to massive job generation, increase the inflow of foreign investment, reduce farm wastage, provide farmers' their due in the form of higher prices for their produce and will not impact the kirana stores in any way. Strong back-end infrastructure would help reduce wastage from farm production and improve efficiencies of a highly fragmented food supply chain in India. The ASSOCHAM Conference on Retail India Industry & Consumers is a part of this campaign. Needless to say that recent policy initiatives of the Government have improved investor sentiments and such initiatives should be supported by all quarters. I convey my good wishes to ASSOCHAM for the success of this Conference. Advantage Farmers,

Rajkumar Dhoot (M.P.) President

MESSAGE

We at ASSOCHAM believe that foreign investments in Indian Retail Sector will inject competition and efficiencies, create new jobs across the country and reduce the

M e s s a g e

considerable difference in farm gate, wholesale and retail prices. FDI in multi-brand retail will bring in huge investments in the hitherto expensive cold chain infrastructure like warehousing and refrigerated trucks to service the front-end businesses. ASSOCHAM has already launched an awareness campaign across the country focusing on the benefits to Farmers, Industry, Consumers and other stakeholders as well as the precautions that need to be taken. We would like to thank YES BANK for preparing a White Paper on FDI in Retail: Advantage Farmers for this Conference along with ASSOCHAM.

D. S. Rawat Secretary General

FOREWORD

F o r e w o r d

The retail sector in India is expanding and modernizing rapidly in line with India's economic growth. With such rapid growth, we are at a point where consumption growth will witness not just increased penetration in existing categories but also the launch of a number of new products and categories in India. The overall retail market (organized and unorganized) is expected to grow at a compounded rate of 15% over the next 5 years from INR 23 trillion in 2011-12 to INR 47 trillion in 2016-17. Rising incomes will be the primary driver of this growth. Favourable demographics, increasing urbanization and nuclearisation of families are other factors which will drive retail consumption in India. Organized retail, which constituted a low 7% of total retail in 2011-12, is estimated to grow at a CAGR of 24% and attain a 10.2% share of total retail by 2016-17. In short, both unorganized and organized retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years. This is clearly not a case of a zero sum game as both organized and unorganized retail will see a massive scaling up of their activities. In fact, the retail sector, left entirely in the unorganized and informal segment of the economy, could well emerge as a major bottleneck to raising productivity in both agriculture and industry. The Government of India recently launched a package of landmark reforms on September 14, 2012 allowing Foreign Direct Investment in multi-brand retail among other sectors. The policy is a strong statement of intent from the Government with respect to multi brand retailing and will assure international retailers about the long term opportunity for retail in India. This opportunity will see investments happening in frontend retail, supply chain and wholesale. Some implementation issues such as permission from State Governments, 30% sourcing from small scale units, cities in which roll-out will be permitted etc. do remain. However, the sector continues to be attractive in terms of growth potential. This report FDI in Retail Advantage Farmers by YES BANK, outlines the retail scenario in India from the food and agri perspective and seeks to provide a snapshot of the impact of FDI in retail on the food, agriculture and agribusiness stakeholders. The rationale for this report is to present the facts related to FDI and highlight its key takeaways for policy makers, industry leaders and other stakeholders in an effort to catalyze the positivity and elucidate the benefits of this path breaking reform measure. Regards

Dr. Rana Kapoor Senior Vice President, ASSOCHAM and Founder, Managing Director & CEO

CONTENTS

EXECUTIVE SUMMARY

13

INTRODUCTION

14

C o n t e n t s

RETAILING IN INDIA CURRENT SCENARIO Sales in Retailing by Category (Store v/s Non Store) Share of Verticals in Overall and Organized Retail Sales in Retailing by Category (Grocery v/s Non Grocery) Sales in Grocery Retailers by Category (Modern v/s Traditional) Employment in Retailing

15 15 16 17 18 21

RETAIL SECTOR FUTURE PROSPECTS Overall Retail Growth in India

23 23

RETAIL POLICY SCENARIO Policy before Opening up of FDI In Retail Multi-Brand Retail FDI Policy in Other Countries Current FDI Policy

27 27 27 28

FDI IN MULTI-BRAND RETAIL IMPACT ON FOOD, AGRICULTURE AND AGRIBUSINESS Agri Infrastructure Creation Current Scenario of Agri Infrastructure in the Country Need for Warehousing Need for Cold Storages Role of FDI in Creating Infrastructure Building an Efficient Supply Chain Impact on Food Inflation Impact on Consumers Employment Opportunities

31 31 31 33 34 34 35 39 39 40

CHALLENGES AND RECOMMENDATIONS Challenges before the Organized Retail Sector Policy Recommendations

41 41 41

BIBLIOGRAPHY

42

Executive Summary
The outlook for the retail industry in India looks promising on grounds of policy reforms, increasing disposable incomes and ourishing consumerism, a strong expected GDP growth and the advent of latest technologies in the country. The opening up of Foreign Direct Investment (up to 51%) in the multi-brand retail segment is expected to bring in an investment of over INR 400 billion and open up huge opportunities for farmers, the industry and consumers. In the past few years, domestic enterprises have already entered into the arena of multi brand retailing. The consumers have bene tted from these enterprises, however concerns remain on the bene t to the farmers. This is because neither the Government nor the domestic players have been able to create the necessary back-end infrastructure which could provide a seamless ow of goods from the farm gate to the end consumers. Through FDI in retail, major foreign players are now expected to change the game and create a win-win situation for the farmers, suppliers, consumers, the country's economy as well as the enterprise itself. FDI in retail is expected to bring in adequate infrastructure creation, ef cient management of the supply chain, controlled food in ation, better quality product offerings to the consumers and simultaneously create numerous job opportunities directly as well as indirectly. Like any other sector, organized retailing has been facing major challenges on account of getting the requisite talent and skills, multi license regime, an inef cient supply chain with numerous intermediaries and lack of basic infrastructure. To make this FDI work in tandem with government objectives, the Government has already set some preconditions like: 50% of the foreign investment to be invested in back end infrastructure Minimum sourcing of 30% from the SME's E-commerce in any form being disallowed Such implications will ensure bene ts to all the stakeholders.

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Introduction
Despite a slowdown in economic growth and a depreciating rupee, the retailing industry grew strongly in 2011. With the efforts to curb rising in ation resulting in single digit in ation, the value sales of independent grocers and other retailers received a strong impetus which helped ensure that all categories witnessed growth throughout the year. Other major factors driving retail growth in India included growing urbanization, a greater variety of new stores coming into the picture, as well as international brands entering the Indian market. Indian retail is dominated by a large number of small retailers consisting of local kirana shops popularly known as mom and pop stores, dairy shops, green grocers etc. which together make up the so-called unorganized retail or traditional retail. The value sales of these traditional stores accounted for more than 90% of the sales in the year 2011. The unorganized sector will expand further due to its proximity, goodwill, credit sales, bargaining, loose items, convenient timings and home delivery. The last decade has witnessed the entry of a number of organized retailers opening stores in various modern formats in metros and other important cities. Still, the overall share of organized retailing in total retail business has remained low. The traditional grocery retail is the largest contributor to the total grocery retailing in India. But more than that, it is a major employment provider accounting for 10% of the total employment in the country. This became a major concern for the Indian government while deciding over the opening of FDI gates for India. Other concerns over the possibility of a monopolistic market, exploitation of farmers and loss of consumer base to traditional retail chains were also raised.

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Retailing in India Current Scenario

The Indian retail industry accounted for 9.4% employment and 22% of the country's GDP in the nancial year 2011 The in ation rate also fell from double digits in 2010 to a single digit gure in 2011 thereby driving growth of grocery retailing 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 In grocery retailing, hyper markets were growing rapidly boosting growth in modern retailing in 2011 Private label products for grocery retailers were most prominent across supermarkets and hypermarkets, accounting for between 15% and 30% of total value sales of these two sectors respectively Sales in Retailing by Category (Store v/s Non Store) The retailing segment has come up with various new forms of selling to the consumers. Store based retailing is 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. Exhibit 1: Sales in Retailing by Category (INR billion): 2006-2011

Source: Industry sources and Secondary Research

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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 nonstore 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. Share of Verticals in Overall and Organized Retail The organized retail segment has tried to increase its offerings and make itself a one stop shop for its consumers. Traditionally the food items formed the largest share of the retail segment, but with the organized sector coming up the share of verticals has seen a change with the maximum share taken by the apparels segment. Exhibit 2: Share of Verticals in overall and organized retail Total Retail (2011-12) Verticals Market Size (INR Billion) 16,342 2,727 1,358 Percentage Share 70% 12% 6% Organized Retail (2011 -12) Market Size (INR Billion) 390 563 320 Percentage Share 24% 35% 20% ORP 2.4% 20.6% 23.6%

Food and Grocery Apparel Consumer Durables, Mobile and IT Home D cor and Furnishing Beauty, Personal and Healthcare Pharmacy Jewellery, Watches and Eye Care Footwear Books and Music TOTAL

1,014 1.238 298 940 605 149 23,433

4% 5% 1% 4% 3% 1% 100%

60 160 30 130 98 16 1,607

4% 10% 2% 8% 6% 1% 100%

5.9% 12.9% 10.1% 13.8% 16.2% 10.7% 7.0%

Source: Central Statistical Of ce (CSO), National Sample Survey Of ce (NSSO), YES BANK Analysis

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Food and grocery 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. Exhibit 3: Sales in retailing by category (2006-11)

Source: Industry sources and Secondary Research

During the period 2006 to 2011, grocery retailing has maintained a steady share between 65% to 68% of the total retail sales During the same period, non- grocery retailing accounted for between 32% to 34% of the total retail sales However the trend has been contrary for the two cases. The share of grocery retailing has increased from 2006-11, while that of non- grocery has declined over the same period Sales in Retailing by Category (Grocery v/s Non Grocery) In store-based retailing, which accounts for 99% of all sales, grocery retailers have the major share in sales with 66% share in 2010-11. 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%

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Exhibit 4: Sales in store based retailing by category: 2006-2011

Source: Industry sources and Secondary Research

Sales in Grocery Retailers by Category (Modern vs Traditional) The Indian retail market has traditionally been dominated by the mom and pop stores which make major household goods available in the immediate vicinity. But with the advent of new concepts in the retail format 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. Exhibit 5: Sales in Grocery Retailers by Category: 2006-2011 (INR billion) 2006 Modern Grocery Retailers Convenience stores Forecourt retailers Hypermarkets Supermarkets 68 5 1 22 40 2007 125.4 8 1.4 41 75 6045 1410 4360 275 6170.4 2008 170.4 12 1.4 58 99 6830 1630 4890 310 7000.4 2009 145.4 11 1.4 70 63 7630 1860 5420 350 7775.4 2010 180.3 11 1.3 93 75 8640 2160 6080 400 8820.3 2011 210.6 14 1.6 110 85 9920 2540 6920 460 10130.6

INR Billion
Traditional Grocery Retailers 5435 Food/ Drink/ Tobacco specialists 1220 Independent small grocers Other Grocery Retailers Grocery Retailers
Source: Industry sources and Secondary Research

3960 255 5503

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Independent small grocers such as kirana stores remained the largest channel for grocery retailing in 2011, representing almost 68% of total value Hypermarkets saw strong and steady growth in current value terms in 2011, growing by 18.2% and had a CAGR of 37.9% between 2006 and 2011 Supermarkets saw strong growth in 2011 with a 13.3% current value terms increase and a 16.2% CAGR between 2006 and 2011. This growth was mainly driven by increased sales per outlet in 2011. The contribution of grocery products from hypermarkets and supermarkets increased in 2011 reaching 68% and 73% of current value sales respectively. Convenience stores saw growth of 25% in current value terms in 2011. The small grocery retailers environment, which is dominated by kirana stores (independent small grocers), was still the largest contributor to sales in grocery retail. However, the independent grocery retailers grew at 13.8% in 2010-11 with a CAGR of 11.8% during 2006-11 Exhibit 6: Sales in Modern Grocery Retails by Category (INR billion)

Source: Industry sources and Secondary Research

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Exhibit 7: Sales in Traditional Grocery Retails by category (INR billion)

Source: Industry sources and Secondary Research

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 25.3% during 2006-11 as compared to that of Traditional grocery retailers which was 12.7% 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.In terms of number of outlets the traditional stores accounted for 98% share among grocery retailers. Exhibit 8: Percentage value growth in sales (2006-2011) 2010-11 Modern Grocery Retailers Convenience stores Forecourt retailers Hypermarkets Supermarkets Traditional Grocery Retailers Food/ Drink/ Tobacco specialists Independent small grocers Other grocery retailers Grocery Retailers
Source: Industry sources and Secondary Research

2006-11 CAGR 25.6 23.4 7.3 38.3 16.4 12.8 15.8 11.8 12.5 13

2006-11 Total 212.5 186.3 42.4 406.2 113.5 82.7 108.4 74.9 80 84.3

16.1 25.1 27.4 17 13.4 14.9 17.6 13.9 15.5 14.9

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Employment in Retailing The employment opportunities in the retail sector are de nitely on the rise but organized retail is yet to become a preferred career option for most of India's educated class. Exhibit 9: Employment in Retailing 2006-11

Source: Industry sources and Secondary Research

The overall employment share of retail in India has hovered between 9.3% to 9.4% from 2006 to 2011 In 2011, the retail sector provided employment to 41,000 people as compared to 37,000 in 2006 growing at a CAGR of 2%

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Retail Sector Future Prospects

The overall retail market (organized and unorganized) is expected to grow at a compounded rate of 15 % over the next 5 years from INR 23 trillion in 2011-12 to INR 47 trillion in 2016-17. Overall Retail Growth in India Exhibit 10: Retail growth in India (INR trillion)
50 45 40 35 30 25 20 15 10 5 0 2006 - 07 2011 - 12 (E) 2016 - 17 (P) 12 CAGR 14.5% 23 CAGR 15% 47

E: Estimate, P: Projected
Source: Central Statistical Of ce (CSO), National Sample Survey Of ce (NSSO), YES BANK Analysis

Organized retail is expected to grow faster than total retail at 24 % by 2016-17 as compared to 15% growth of total retail during the same period This growth will be driven by increasing af uence among urban consumers, growing preference for branded products and higher aspirations among youth. On the supply side, this growth will be supported by expansion plans of existing players and the entry of new players. Consequently, organized retail penetration is likely to increase to 10% in 2016-17 from 7 % in 2010-11. Exhibit 11: Organized Retail Penetration
2006- 07 Total Retail INR 10 trillion
14.5% 24 % 21 %

2011- 12 INR 23 trillion

1 5%

2016- 17 (P) INR 47 trillion

Organized Retail ORP

INR 0.6 trillion 5.4%

INR 1.6 trillion 7%

INR 4.8 trillion 10%

Source: Central Statistical Of ce (CSO), National Sample Survey Of ce (NSSO), YES BANK Analysis

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It is expected that store-based retailing will witness a CAGR of 7.6% during 2011-16 and will grow by 44% in absolute terms over this period Within store-based retailing, grocery retailers are forecasted to grow at a CAGR of 8.9% during 201116 and non-grocery retailers will grow at 6% in current sales value terms Exhibit 12: Forecast Sales in store based retailing by category: 2011-2016

Source: Industry sources and Secondary Research

INR billion

Exhibit 13: Forecast sales in grocery retailers by category: 2011-16 (INR billion) Modern Grocery Retailers Convenience stores Forecourt retailers Hypermarkets Supermarkets 2011 211 14.5 1.5 110 85 2012 233 6 2 130 95 10800 2800 7500 500 11033 2013 271.2 19 2.2 150 100 11850 3200 8100 550 12121.2 2014 303.4 21 2.4 170 110 12690 3500 8600 590 12993.4 2015 337.7 24 2.7 190 121 13630 3800 9200 630 13967.7 2016 377 30 3 210 134 14680 4300 9700 680 15057

Traditional Grocery Retailers 9860 Food/ Drink/ Tobacco specialists 2500 Independent small grocers Other grocery retailers Grocery Retailers 6900 460 10071

Source: Industry sources and Secondary Research

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Exhibit 14: Forecast Sales for modern grocery retailers by category (INR billion)

Source: Industry sources and Secondary Research

Exhibit 15: Forecast Sales for traditional grocery retailers by category: (INR billion)

Source: Industry sources and Secondary Research

Among the traditional grocery retailers, kirana stores will continue to be the largest contributor to value share by 2016, expected to account for a 61% share of constant value sales In terms of outlet numbers independent small grocers will account for 74% share in 2016 Hypermarkets are expected to see the fastest growth between 2011-16 with a CAGR of 13.4% and 87.4% in absolute terms

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Modern Grocery Retailers as a whole would grow at a CAGR of 11.7% between 2011-16 as compared to 8.2% for traditional grocery retailers. Exhibit 16: Forecasted sales in grocery retailers by category: Percentage growth (2011-16) 2011-16 CAGR Modern Grocery Retailers Convenience stores Forecourt retailers Hypermarkets Supermarkets Traditional Grocery Retailers Food/ Drink/ Tobacco specialists Independent small grocers Other grocery retailers Grocery Retailers
Source: Industry sources and Secondary Research

2011/16 TOTAL 73.8 82.5 82.2 87.4 54.3 48.4 67.4 41.4 47.9 48.9

11.7 12.8 12.7 13.4 9.1 8.2 10.9 7.2 8.1 8.3

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Retail Policy Scenario

Policy before Opening up of FDI in Retail Foreign Direct Investment in Multi Brand Retail Trading (MBRT) was prohibited. Foreign Direct Investment (FDI), up to 51%, in the Single Brand Retail Trading (SBRT) sector was permitted, under the Government/Foreign Investment Promotion Board (FIPB) route, 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-retailing would cover only products which are branded during manufacturing. (d) The foreign investor should be the owner of the brand Earlier this year, the government allowed 100% FDI in single brand retail with a rider that foreign brands would mandatorily have to source 30% of their requirements from Small and Medium Enterprises (SMEs). Multi-Brand Retail FDI Policy in Other Countries Exhibit 17: Bene ts of FDI in other countries
Country China FDI limits 100% Bene ts Remarks

Impressive growth in First permitted in 1992 with foreign ownership retail and wholesale restricted to 49%, progressively lifted with no trade. restrictions now. Over 600 hypermarkets opened between 1996 and 2001 The number of small outlets (equivalent to kiranas) increased from 1.9 million to over 2.5 million Employment in the retail and wholesale sectors increased from 28 million people to 54 million people from 1992 to 2001. 100% Thailand Referred to as a country where FDI had an adverse Growth in agro effect on the local retailers. processing industry . Has limited capital requirement for retail and wholesale outlets. 100% Russia Supermarket revolution took place in 2000. Heavy growth registered. Indonesia 100% Modern retail took off in 1990s. No limit on number of outlets Matahari is leading chain. Brazil, Argentina, Singapore & Chile allow 100% FDI in retail sector while Malaysia permits FDI to a certain limit.
Source: Industry sources and Secondary Research

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Current FDI Policy

Exhibit 18: Timeline of FDI Policy in Retail in India

Liberalization Indian economy opened, with FDI up to 51% allowed under the automatic route in select priority sectors

FDI up to 51% allowed with prior Government approval in Single Brand Retail

Government proposed allowing FDI in Multi-Brand Retail

1997 1991 2006

2008 2010

2012

FDI up to 100% allowed under the automatic route in Cash and Carry (Wholesale)

Government mulled over the idea of allowing 100% FDI in Single-Brand Retail and 51% FDI in MultiBrand Retail

Government allowed 100% FDI in Single-Brand Retail and 51% FDI in MultiBrand Retail (Subject to prescribed conditions)

Source: YES BANK Analysis

The Government of India launched a package of landmark reforms on September 14, 2012 allowing Foreign Direct Investment in multi-brand retail among other sectors. The key highlights of the Policy with respect to Multi-Brand Retailing are as follows: FDI upto 51% permitted under Government approval route (i.e. prior approval from Government of India before induction of FDI). Fresh agricultural produce including fruits, vegetables, owers, grains and meat products although unbranded may be traded Minimum investment of USD 100 million to be infused by Foreign Investor At least 50% of the Foreign Investment to be invested in back-end infrastructure within 3 years of induction of FDI to include investments made towards Processing Manufacturing Distribution Design Improvement Quality Control Packaging Storage Warehousing Agriculture market produce infrastructure and logistics

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Expenditure on land cost and rentals, if any, would not be counted towards back-end infrastructure Minimum sourcing of 30% of manufactured/processed products from Small Scale Industries (units with gross value of Investment in Plant & Machinery not exceeding USD 1 million) The procurement requirement has to be met in the rst instance within an average period of 5 years beginning 1st April of the year during which rst tranche of FDI is received and is to be met on an annual basis thereafter Government of India to have the rst right to procurement of agricultural products Self Certi cation by the Company on compliance with above conditions and these may be veri ed by the Government The decision to permit setting up of retail outlets has been left to the state governments. These outlets may be set up in cities with population of more than 1 million as per 2011 census (including an area of 10 sq. km around the municipal/urban limits) For States/UTs not meeting the above criteria, outlets may be setup in cities as decided by the respective State Governments. Retail trading in any form, by means of e-commerce, would not be permissible for companies with FDI engaged in the activity of multi-brand retailing. The States/Union Territories that have coveyed acceptance for implementation of the policy are as follows: Andhra Pradesh Assam Delhi Haryana Jammu & Kashmir Maharashtra Manipur Rajasthan Uttarakhand Daman & Diu and Dadra & Nagar Haveli (Union Territories)

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FDI in Multi-brand Retail and Agribusiness

Agri Infrastructure Creation

Impact on Food, Agriculture

Provision of adequate infrastructure, in terms of both quantity and quality, is very essential for rapid achievement of sustainable economic growth. While the precise linkages between infrastructure and development are yet to be rmly established, it is estimated that infrastructure capacity grows in step with economic output. A 1% increase in the stock of infrastructure is associated with a 1% increase in GDP across all countries (Summers and Hastens, 1991). Similarly access to appropriate infrastructure services is considered as the most important factor to growth of Agribusiness. Provision of adequate and quality infrastructure is necessary for increasing the productivity and ef ciency of agri value chain. The spread of technology in agriculture depends critically on both physical and institutional infrastructure. It is estimated that worldwide 15 % of crop produce is lost between the farm gate and the consumer because of poor roads and inappropriate storage facilities alone (World Bank, 1997). Retailing is a technology intensive industry. Successful retailers use their distribution and information systems closely to predict consumer demand, shorten lead time, and reduce inventory holding and hence save cost . The entry of modern retail formats in India will undoubtedly bring with it an intensive infrastructure creation. More focus will lie on cold chain infrastructure warehouse distribution in order to strengthen the supply chain. Current Scenario of Agri Infrastructure in the Country The warehouses in our country have been built following traditional norms and without proper speci cation. They lack in optimal size, adequate design, ventilation facility, inventory management and storage system. According to latest estimates, 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. Thus there exists a huge demand supply mismatch. Warehouse accounts for the largest share of infrastructure segments in the logistic industry claiming around 6-7%. 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. 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

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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. As per industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. 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 ows into this sector have been insigni cant. The warehousing industry in highly fragmented in India with the organized segment having an estimated share of almost 90% of the total warehouse capacity. In terms of value, market size of warehousing in FY 09 was INR 19,200 crore and it grew to INR 22,810 crore in FY 11 and is expected to grow to INR35,100 crore in FY 16 with a CAGR of 9 %. In this, only 12% accounts for agri warehousing and the rest 88% is for industrial purposes. The key growth drivers for the cold storage industry in India are increasing demand for food products, recent developments in processed food industry, growing EXIM trade in food products, organized retail industry, emergence and growth in retail and food service industry and regulatory impetus from government. Some of the major risks/threats involved in this industry are due to changing demand patterns and seasonal variation competitive pressure, location risks, safety issues and handling of commodities. India has nearly 23 million MT of cold storage facilities where as it currently needs at least 9-10 million MT more of capacity. Uttar Pradesh, West Bengal and Punjab account for around 70% of the capacity. The overall market size of the cold storage segment is expected to grow at a CAGR of 16-17% in the next 3-4 years. Exhibit 19: Current status of warehousing capacity in India Name of the Organization/Sector Food Corporation of India (FCI) Central Warehousing Committee (CWC) State Warehousing Committee (SWC) State Civil Supplies Cooperative Sector Private Sector Total
Source: Government of India

Storage Capacity (in million MT) 32.05 10.07 21.29 11.3 15.07 18.97 108.75

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Exhibit 20: Percentage distribution of Cold Chain sub sectors in India

Source: Ministry of Food Processing Industries (MoFPI), National Horticulture Mission (NHM), Agricultural and Processed Food Products Export Development Authority (APEDA)

Need for Warehousing An 11th Plan working group has estimated a total investment of INR. 64,312 crore in agricultural infrastructure. A storage capacity gap of 35 million tonnes has been assessed, requiring an estimated investment of INR 7,687 crore during the 11th Plan. There has been a record level of procurement of food grains in the last 4-5 years by government/FCI and due to this several states have been facing problems of covered storage capacity. In Rabi Marketing System (RMS) 2011-12, FCI procured around 281 lakh MT of wheat which was 30 lakh MT more than the earlier record procurement and procurement of rice in Kharif Marketing Season of 2010-2011 was around 335 lakh MT. Exhibit 21: Procurement of wheat during last ve Rabi Marketing Seasons (RMS) in lakh MT RMS 2007-08 111.28
Source: Government of India

RMS 2008-09 226.89

RMS 2009-10 253.82

RMS 2010-11 225.25

RMS 2011-12 281.44

Exhibit 22: Procurement of rice during last ve Kharif Marketing Seasons (KMS) in lakh MT RMS 2006-07 251.07
Source: Government of India

RMS 2007-08 284.91

RMS 2008-09 336.83

RMS 2009-10 320.00

RMS 2010-11 335.16 (as on 12th Sep 2011)

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Analyzing the table above, availability and augmentation of storage capacity is one of the main priorities of Government of India. There is a dire need for the creation of suf cient modern warehousing capacity in the country to store and preserve food grains apart from construction of storage facilities like seeds and fertilizer. Need for Cold Storages 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. India currently has nearly 23 million MT of cold storage facilities where as it needs at least 9-10 million MT more capacity. Uttar Pradesh, West Bengal and Punjab account for around 70% of the capacity. 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. Exhibit 23: Commodity wise breakup of cold chain industry Potatoes Multi purpose Meat & Fish Fruits and Vegetables Milk & Milk Products Others
Source: Industry Sources

77.6% 20.8% 0.8% 0.4% 0.3% 0.1%

Role of FDI in Creating Infrastructure The Internal rate of Return (IRR) for agricultural warehouses in India is estimated to be around 18-20%. Building a civil structure comprises the major chunk of expense in an agriculture warehouse followed by land and land development while the operating cost is fairly distributed among employee cost, fumigation, electricity etc. Similar is the case with cold storages which demand huge investment for maintaining congenial temperature throughout the supply chain. The opening up of FDI in Retail will bring in investments in this eld 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. 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 bene t the farmers immensely by creating feasible and competitive marketing alternatives for their produce.

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Building an Ef cient Supply Chain 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 ef ciency and minimize risks. Product and market standards change with time which in turn, require changes from various actors in the value chain that supply these products to meet market requirements. But this has not been the case with the Indian Agri supply chain which has by and large remained the same over the years, not incorporating the required changes for development and increased ef ciency. The farmers in India receive a share of less than 30% for most of the foodgrains 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 speci c 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 signi cant margins are added up to the cost of produce. But these margins are signi cantly higher in case of Fruits and Vegetables owing to their shorter shelf life and greater perishability. 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.

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Exhibit 24: Illustration of price escalation observed for grains and cereals.
1.7 28% of the price built up before produce reaches the processor 12% of price built up between mandi and the processor 0.2 0.4 0.5 INR 10.7/kg

0.8

INR 6/kg

0.3

0.15

0.35

0.1

0.1

0.1

10.7

Agent Commission

Farm Gate Price

Cost of Aggrega on

Losses in Grading / Sor ng

Value Addi on Cost

Broker Commission

Costs incurred by aggregator at farm

Costs incurred by aggregator at mandi

Source: Trade sources, Secondary Research

Exhibit 25: Illustration of price escalation observed for fruits & vegetables
INR 8.3/kg

1.4 47% of the price built up before produce reaches the processor 10% of price built up between mandi and the processor 0.4 0.6 INR 4/kg 0.2 0.1 0.1 0.1 0.1 0.3 0.6 0.4

Agent Commission

Farm Gate Price

Cost of Aggrega on

Value Addi on Costs

Broker Commission

Costs incurred by aggregator at farm

Costs incurred by aggregator at mandi

Source: Trade sources, Secondary Research

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Losses in Grading / Sor ng

Price to Consumer

Loss in Transit

Market Yard Cess

Processor Margin

Transport Cost

Channel Cost

Storage Cost

Price to Consumer
8.3

Loss in Transit

Market Yard Cess

Processor Margin

Transport Cost

Channel Cost

Storage Cost

Entry of players in the organized retail tends to make the supply chain more effective and ef cient by: Sourcing directly from the farmers or atleast 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. Exhibit 26: Between Farm and Fork

Farmers / Producers

7
Rural Primary Markets

layers between Farmer and Consumer Farmers / Producers

layers between Farmer and Consumer

Direct Markets

Commission Agents 1 or 2 levels

Collec on, Value Addi on, Sor ng, Grading, Washing, Drying and Precooling Processors

Regulated / Wholesale Markets (Lacking Grading and Pre-Cooling facili es)

Regulated Markets

Storage and Distribu on Centers (Cold Storage)

Whole Sellers

Processors

Exporters

Retail Vendors Organized Retail Stores

CONSUMERS
Source: Economic Times

Direct procurement also gives the farmers certain indirect bene ts 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.

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Exhibit 27: Supply chain ef ciency in direct procurement

Traditional Supply Chain Channel Partner Consumer Pays Retailer Wastage Retailer Margin Semi Wholesale Wholesale Wastage Whole Seller Commission Transit Wastage Village Consolidation Post Harvest Wastage Net to Farmer TOTAL
Source: YES BANK Analysis

Disintermediated Supply Chain Channel Partner Consumer Pays Retailer Wastage Retailer Margin Semi Wholesale Percentage Share 94% 6% 25% 0% 5% 0% 2% 2% 4% 50% 94% Remarks

Percentage Share 100% 5% 22% 5% 3% 8% 5% 2% 8% 42% 100%

Bene t to customer of 6% Actual accountings Retailer margin increased Semi-whole seller eliminated Incurred cost on Distribution (Cold Chain) Whole seller eliminated Reduced by 3% Net savings Net savings of 4% Increased earnings by 8%

Distribution Whole Seller Commission Transit Wastage Consolidation Expenditure Post Harvest Wastage Net to Farmer

However, a counterview and separate study has shown the following: A look at the modern organized chains initiatives of buying directly from farms rather than mandi's paints a sordid picture. Producing directly from farms has been costlier compared to procurement through middlemen at market. The reason being that the overhead costs for the retailer increases as he tries to construct and maintain storage facilities, invests in a front end infrastructure, pays for the transportation, pays the farmer more for a better quality produce taking the risk in the context that consumer might not actually be willing to pay a higher price for that quality as it is subject to discretion. Moreover, the administrative costs and control measures increase as larger and skilled manpower is required for administering the operations right from the fram level, an accounting system needs to be maintained and procurement at a large scale needs enhanced monitoring. The below given example shows the investment that a rm will have to make if it plans to buy either 20,000 tonnes of wheat or 5,000 tonnes of tomatoes.

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Exhibit 28 : Breakup of farm produce acquisition S.No 1 2 3 4 5 6 7 8 9 Details No. of Buying Units Direct Manpower required Outsourced Manpower required Payment Terms Quality Deductions Enforcement Ability to Stop Buying Pricing Administrative Complexity Added Costs Method of Aggregation 7 9 7 Spot Dif cult Impossible MSP + High Signi cant Farmer Trade 1 2 2 Credit Acceptable Easy Market Low None

Source: YES BANK Analysis

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 bene t 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 bene t 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 nance, technical support and inputs. Impact on Food In ation In the past few years the food in ation has shot up by a double digit growth and whenever the control measures have been suggested, they pertain to the supply side of the food chain. FDI in retail will give impetus to the backward linkages which is essential for controlling food in ation. Players in the organized retail sector will create adequate infrastructure facilities, thereby reducing wastages and increasing the supply of commodities, bringing down their prices considerably. Impact on Consumers The strongest impact of organized retailing would be seen on the consumers. Along with the increase in disposable income and increased discretionary expenditure, the consumers will get better choice of formats

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Due to the Direct Procurement model followed by organized retailers, there would be substantial cost savings through disintermediation which would ultimately bene t the consumer. Exhibit 29: Illustration of effect on farmer and consumer prices due to direct procurement

Original Price Level

Anticipated Price Level

Consumers Price

Farmers Price

Markup
Source: Trade sources,YES BANK Analysis

Employment Opportunities Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management and the front-end retail business. Industry estimates suggest employment of one person per 350-400 sq.ft of retail space, which means nearly 1.5 million jobs will be created in the front-end alone in the next 5 years. Assuming that 10% extra people are required for the back end, the direct employment generated by the organized retail sector in India over the coming 5 years will be close to 1.7 million jobs. Indirect employment generated on the supply chain to feed this retail business will add millions of jobs.

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Challenges and Recommendations

Challenges before the Organized Retail Sector The organized retail sector has recently emerged from its nascent stage but has shown signi cant growth owing to the changing buying behavior of the Indian consumers. Retailing in India is gradually inching its way forward to become the next boom industry. But, the Indian educated class is yet to explore the options of a lucrative career in the organized retail sector. The challenges faced by the organized retail sector are: Shortage of desirable talent and lack of skilled manpower. The inef ciencies in the current supply chain and the presence of numerous intermediaries are dif cult to curtail. The quality of produce demanded by the consumer is still far from what our framers produce. The rapid growth of the organized retail segment is checked by the numerous clearances that are required to set up a retail outlet Lack of basic infrastructure like roads, power, water etc. is a major shortcoming that needs to be addressed in order to procure as well as supply on a pan India basis. Policy Recommendations Modernization of traditional markets through Public Private Partnerships. Modernization of APMC markets with incorporation of the Model Act in all the states. Initiating a uniform license regime applicable nationwide and doing away with the numerous permits that are currently required for the establishment of retail outlets. Replication of the metro Cash-and-Carry outlets of China, for sale to unorganized retail and procurement from farmers. Facilitate the formation of associations and cooperatives of unorganized retailers for procuring directly from suppliers and farmers. Encourage farmers to form similar cooperatives to sell to organized retailers. Facilitate innovative banking solutions to ensure credit availability to unorganized retailers and farmers from nancial institutions. Stringent rules to be formed against collusion and predatory pricing and a code of conduct to be drafted for the organized retail sector for dealing with their suppliers

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Bibliography
Department of Industrial Policy and Promotion Central Statistical Of ce, Government of India National Sample Survey Organization Ministry of Food Processing Industries, Government of India Indian Council for Research and International Economic Relations National Bank for Agriculture and Rural Development Ministry of Agriculture, Government of India Ministry of Statistics and Program Implementation, Government of India Economic Times Retailing 360 Financial Express Hindu Business Line India Retail News Business Standard Domain B

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