FDI in Multi Brand Retail Trade The Journey

Dinodia Capital Advisors

September 2012
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Executive Summary
For more than a year, every problem in India has been blamed on the incumbent
government by national and international lobbies and Policy Paralysis has been the
reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high
inflation, high interest rates and delayed capital expenditure plans
On September 14, 2012 the government broke the shackles and came out with the much
needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the
Multi-brand Retail Sector (MBRT) of India with a surety of no roll back this time
Dinodia Capital Advisors view is that these reforms will create price competition and
remove the multiple layers of inefficiency between the farmers and the final retailer and
hopefully help the farmers and producers of goods realize a bigger share of the pie in
the long-run
Given the current negative sentiment of foreign investors (post Vodafone and Draft GAAR
Guidelines) and the lack of capital inflows in India, these reforms will encourage foreign
firms to give India a serious look and encourage them to invest capital in the country
As foreign firms who partner with local Indian firms are able to generate profits and achieve
success in India it will encourage FDI in other sectors as well and create a positive
image for India globally as a good place to do business!
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The Story So Far.
1997
2006
2010
2011
2012
100% FDI being
permitted in cash &
carry wholesale trading
under the government
approval route
FDI permitted in cash & carry,
wholesale trading comes under
the automatic route
FDI in single brand retail was
permitted to the extent of 51%
DIPP had put up a discussion
paper proposing FDI in multi-brand
retail
Union Cabinet approved
51% FDI in multi-brand retail
Increasing the FDI limit in single
brand retail to 100%
However the implementation was
deferred, for evolving a broader
consensus on the subject
January
DIPP notified the
decision to allow 100%
FDI in Single brand
retail
September
Union Cabinet approves
the FDI limit in Multi
brand retail of 51%
*DIPP: Department of Industrial Policy and Promotion
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The Policy - Single Brand Retail Trading
EARLIER NOW
FDI in single brand retail trading is permitted
up to 100% with Government approval
Products to be sold should be of a Single
Brand only
30% sourcing is to be done from micro and
small industries (investment in Plant and
Machinery not exceeding US $ 1mm)
This condition will ensure that SME sector,
including artisans, craftsman, handicraft and
cottage industry gets the benefits of
liberalization
For Single Brand Retail Trading (SBRT)
sector only 51% FDI permitted subject
to approvals and conditions such as:
Products should be of a Single
Brand only
Products to be under the same brand
in one or more countries if are sold
outside India
Single Brand products should be
branded during manufacturing
The foreign investor should be the
owner of the brand
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EARLIER
FDI in Multi Brand Retail Trading was not
allowed
FDI in Multi Brand Retail Trade is permitted up
to 51%, subject to following conditions:
Outlets to be set up - only in cities with a
population of more than 1m (within a 10km
range)*
Minimum investment by the foreign investor -
US $100mm and at least 30% of the
procurement of manufactured / processed
products shall be sourced from 'small
industries (investment in Plant and Machinery
not exceeding US $1million)
Sourcing requirements will be checked
together for first five years after that on a
annual basis
Retail trading by means of e-commerce not
permissible
At least 50% of total FDI brought in shall be
invested in back-end infrastructure** within
three years of the induction of FDI
NOW
The Policy - Multi Brand Retail Trading
* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana,
J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and
Dadra Nagar Haveli
** Back-end Infrastructure includes supply chain, logistics and warehousing but
not land and rentals
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SWOT Analysis of FDI in Retail
S
TRENGTHS
W
EAKNESSES
O
PPORTUNITIES
T
HREATS
Retail is a $450bn Industry in
India
Young and dynamic manpower
Highest shop density in the world
High growth rate in retail &
wholesale trade
Presence of big industrial houses
with deep pockets
High capital investment required
in the retail sector (real estate)
Lack of trained and educated
work force
Higher prices as compared to
local shops
Will mainly cater to high-end
consumers placed in metros
High employment generation in
the future
Will enhance financial condition of
farmers
Encourage foreign capital inflows
Result in increasing supply-chain
efficiency
Improve Logistics & Infrastructure
Effect on the small retailers - local
Kirana stores (mom-pop stores)
Long gestation period - Foreign
Retailers will take a while to adapt
to India and generate profits
States not buying in so
efficiencies expected may not be
achieved
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Subsequent populist decisions are feared, such
that the foreign retailers may not be able to
achieve dominant market positions or buy / rent at
the right locations
Rough ride so far..
It is not easy to be successful in a place where culture, tradition and food habits change
every 124 miles
Some of the largest and most prominent Indian business houses such as Reliance, Godrej,
RPG and the Future Group have all struggled in the Retail Industry in India
1
. These large
players have lost a significant amount of money and in fact one of the leaders in the space,
Subhiksha, which at one time had almost 1,600 outlets has shut down
Indias image is one of a fickle policy maker with regulations being frequently changed,
rolled back and even retrospectively amended have made investors speculative
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In order to read a detailed report on the Indian Retail Industry please visit:
http://www.dinodiacapital.com/research.asp
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Hidden Opportunity despite the rough ride
A comparison of the Retail Industry in Emerging Markets shows that India actually has the
lowest organized retail sector amongst its peers and therefore is the biggest opportunity
Indias closest peer in terms of size of population, China, has an organized retail market that
is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th
of India in terms of population has a organized retail market of almost 6x of that of India
and mostly homogeneous tastes across the country making it easy to standardize offerings
Indonesia which is the largest economy in Southeast Asia and often cited as replacing
India as the I in BRIC economies has displayed strong growth in 2011 and in the first half
of 2012 with significant growth in the Retail sector. It has only 1/5th of Indias population
and yet has a organized retail sector which is 5x of that of India
There are two ways to look at the above data. One is to see that there are plenty of
emerging markets where more capital could be deployed in retail, but the other is to see
the hidden opportunity in investing in the retail sector in India (the 2nd largest country in
the world in terms of population) where there is a white canvas and wide spaces and the
story of organized retail can be painted in whichever way the potential foreign entrants desire
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Global Experience of FDI in Retail
India
FDI allowed
51% in Multi-
brand &
100% in
Single Brand
Population
1,210m
Share of
organized
retail 5-6%
Top Retailer:
Future Group
Brazil
FDI allowed
100%
Population
205.7m
Share of
organized
retail 36%
Top Retailer:
Pao de
Acucar
Russia
FDI allowed
100%
Population
143.1m
Share of
organized
retail 33%
Top Retailer:
X5 Retail
Group
China
FDI allowed
100%, up
from 49% in
1992
Population
1,343m
Share of
organized
retail 20%
Top Retailer:
Bailian Group
Co Ltd
Indonesia
FDI allowed
100% in 1998
Population
242.3m
Share of
organized
retail 30%
Top Retailer:
Matahari
Putra Prima
Emerging Markets which allowed FDI in Retail with the share of
organized retail in the overall retail industry:
Source : Goldman Sachs, Technopak
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Find a Joint Venture Partner
The maximum equity stake which a Foreign investor can
hold cannot be more than 51%, therefore it will have to
find an Indian partner to enter into a Joint Venture with
Look for space It will have to look for a city with a
minimum population of 1 million as per the 2011 census.
India comprises of about 51 cities which meet the
condition. Further state government and FIPB
permissions will be required
Get it approved - All the regulatory approvals of FDI and
other applicable laws will have to be obtained, which will
be easier to do, given the presence of Indian partner
Steps to Establish Presence in India
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Proposed Business Model
Indian Partner
- To provide 49% stake in
form of capital /
infrastructure or leverage
their network to establish
presence
-They will also be able to
navigate the political and
legal hurdles as well as
use their local knowledge
and brand
Foreign Partner
- To provide capital of at
least US $100mm
- They will bring
technology, efficiency in
supply chain
management and global
experiences from
previous ventures
Outcome:
- There is a possibility of a mutually symbiotic relationship between the
Foreign and Indian Partner to jointly harness their capabilities and
create a world-class Retailer in India, which will have the unique
advantage of a being the first mover and establishing the benchmark of
excellence for the Industry
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The ride despite the speed breakers
There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign
Retailers to co-exist in India
The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have
a homogenous selection of products across their stores, typically need 150,000 sq feet of
space and require a car to get to. India is years away from when majority of its population
will have the ability to only shop at the Wal-Marts of the world. Competition will force the
Kirana Stores to lift their game, become more price competitive, have a better selection
of goods at lower prices and maintain proper records of customers (people will still shop
there for proximity, comfort of relationship and easy credit)
Foreigners will bring to India their expertise and efficiency in retailing, they will invest
capital in improving logistics and infrastructure in India (for example: Cold Storage
Logistics is still almost non-existent in India) and share technology and know-how with their
local Indian Partners, but will also be able to become profitable over a period of time as their
brands and presence increase across the country
Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts
and just as in Brazil foreign retailers thrive but still a local player is the most dominant
(Pao de Acucar) India will see a much more inclusive and efficient Retail Industry
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On the whole, if India has to grow it needs capital, training
and innovation. Yes the short-term effects of the announced
reforms will be painful, but in the long-term if they will help
make Retail a more organized industry in India, provide
better quality goods at cheaper prices at convenient
locations, improve infrastructure and the supply chain
mechanism throughout the country, provide employment
and retail sector specific training to a large population it will
be a huge boon to the nation
Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But
those who are willing to be patient and make a more long-term bet on India, definitely have the
opportunity to HIT THE BULLS EYE. India is a virtually untapped and a huge growing market
in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail).
The foreign players who are willing to learn from their mistakes in other emerging markets and
early experiences in India, go through a careful partner selection process, understand the
political / legal / external hurdles and invest with a realistic time horizon truly have an
unique opportunity to create win-win situations for all stakeholders. Several other sectors have
seen foreign entrants with a successful and profitable model in India (Dominos, Citigroup,
Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the times to come!
The ride despite the speed breakers
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Dinodia Capital Advisors
Dinodia Capital Advisors
Corporate Profile
Dinodia Capital Advisors is a Financial Consulting firm
based in New Delhi, India. It assists clients across all
industries grow, both organically and inorganically. The
firm helps clients Raise Capital. Execute Merger &
Acquisition opportunities. Restructure, Transform and
Turnaround businesses. Resolve challenging problems.
Take advantage of financial and strategic opportunities.
Balance investor expectations. DELIVER VALUE
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Dinodia Capital Advisors
Service Offerings
Dinodia Capital Advisors Advice Clients on :
Mergers and Acquisition
We help in conducting a robust scan
of the market and selecting the most
suitable buyer or seller
Capital Raising
We advice clients on their capital
needs and find them the right
partner who brings more than just
capital
Restructuring
We advise on business
restructurings to help achieve
financial, strategic and operational
efficiency
India Entry Strategy
We help set up and incubate
businesses in India, acting as a
trusted advisors to facilitate the
India entry strategy
Organizational
Transformation
We work with companies to put
systems, processes and
people in place to help take
advantage of both organic and
inorganic synergies
Turnarounds
We work closely with companies to
help devise and implement a
turnaround strategy by plugging the
deficiencies of management,
technology, capital or partnerships
Dinodia Capital Advisors Private Limited
C-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.com
Tel No: +91 11 2341 7692, 2341 5272 ,Fax No: +91 11 4151 3666
Email: dinodiacapital@dinodiacapital.com
For Further Details, Contact :
Pankaj Dinodia
Chief Executive Officer
Email: pankaj.dinodia@dinodiacapital.com
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