Foreign Direct Investment in Retail: February 23, 2004

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
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
3
Retailing: An overview
 Retailing
 World’s largest private industry
US$ 6.6 trillion sales annually
 Indian retailing
An overview  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
*www.etretailbiz.com/dec2002
4
Retailing: 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)
An overview 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
5
Agenda
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
6
Evolution of Indian retail Modern Formats/
Historic/Rural Traditional/Perva Government
International
Reach sive Reach Supported
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 Neighborhood Availability/ Shopping
Entertainmen Stores/Convenie Low Costs / Experience/Efficie
t nce Distribution ncy
7
Evolution of Indian retail
 Informal retailing Sector
 Typically small retailers.
 Evasion of taxes
 Difficulty in enforcing tax

collection mechanisms
 No monitoring of labor laws
Indian retail
 Formal Retailing Sector

 Typically large retailers
 Greater enforcement of taxation

mechanisms
 High level of labor usage monitoring
8
Categories of Indian retail
 Corporate Houses
 Tatas: Tata Trent
 RPG group: Food World, Health
and Glow, etc

 ITC: Wills Life Style
 Rahejas(ShoppersStop),
Indian retail 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
9
Classifying Indian retail
 Modern Format retailers
 Supermarkets
(Foodworld)
 Hypermarkets (Big
Bazaar)
 Department Stores (S Stop)
 Specialty Chains (Ikea)

Indian retail  Company Owned Company Operated
 Traditional Format Retailers

 Kiranas: Traditional Mom and Pop
Stores
 Kiosks
 Street Markets
 Exclusive /Multiple Brand Outlets
10
Large Indian retailers
 Hypermarket
 Big Bazaar
 Giants
 Shoprite
 Star
 Department store
 Lifestyle
Indian  Pantaloons
retailers  Piramyds
 Shoppers Stop
 Trent
 Entertainment
 Fame Adlabs
 Fun Republic
 Inox
 PVR
11
Agenda
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
12
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
Indian population
consumer  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
13 †FromEuromonitorRetail Survey
The changing Indian consumer
 The urban consumer
 Getting exposed to international
lifestyles
 Inclined to acquiring asset
 More discerning and demanding

than ever
Indian  No longer need-based shopping

consumer  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
*DatafromNCAER
14
Anticipated growth
 Market size
 Current market size is roughly US$
286 bn*
 96% of the 12 Million stores are less
than 500 Sq. ft.

Anticipated  Forecast Growth rate for the retailing
growth
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
*FromICICI Retail Report
15 **FromEuromonitorRetail Survey
Industry Low
dynamics
 domestic competition
 Because of fragmented nature of
industry
 Lack of exposure to global best

practices
 Low entry barriers for unorganized
Industry retailing
dynamics  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
16
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,
RE issues 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
17
Growth factors
 Growth determining factors

 Government Policy
 Infrastructure development
Growth  GDP growth
factors  Employment generation and job

creation
In several new sunrise industries
Implies greater purchasing power
18
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
Advantage  Implies lower barriers of entry
India 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
19
Agenda
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
20
 Current Indian FDI Regime
 FDI not permitted in retail trade
sector, except in:

 Private labels
 Hi-Tech items / items requiring
specialized after sales service

FDI in Retail
 Medical and diagnostic items
not
 Items sourced from the Indian
permitted
small sector (manufactured with
technology provided by the
foreign collaborator)
 For 2 year test marketing
(simultaneous commencement of
investment in manufacturing
facility required)
21
 Metro Group of Germany
 Cash-and-carry wholesale trading
 Proposal faced strong opposition
 Entities established prior to 1997

 Allowed to continue with their
Current FDI existing foreign equity components.
 No FDI restrictions in the retail
sector pre-1997
 Foodworld
 51:49 JV between RPG and Dairy
Farm International,
 Leading food retailer in India now
 Mc Donalds
22
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
How they has right to appoint local franchisees
are present 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
23
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
How they
are present brand
Swarovski, Hugo Boss
 Wholesale trading
 Cash and Carry operations
 100% FDI permitted
 Metro Cash n Carry
24
Agenda
Indian retail
Why FDI ?
How FDI ?
Incentives for FDI
Recommendations
25
Why FDI?
 Improve competition
 Develop the market
 Greater level of exports due to
increased sourcing by major players
 Sourcing by Wal-Mart from China
Benefits of
improved multifold after FDI
FDI permitted in China
 Similar increase in sourcing
observed for Metro in India
 Provides access to global markets
for Indian producers
26
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
Benefits of  Better lifestyle
FDI  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
27
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
Benefits of as seen from the experience of
FDI 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
28
Benefits to the government
Greater Consumer
Greater Per
Spending due to
Capita Income
economic boom
GDP Growth
Employ Benefits Greater

ment to Govt. Exports
Increasing Greater
Tax Paying Sourcing
Increased Tax
Population From India
Revenues
Reduced Tax
Evasion
29
BenefitsIncrease
to the
 government
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  Does not need very high skill sets
govt.  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
30
Agenda
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
31
How FDI ?
 FDI should be allowed in stages
 Initial stages: 26% FDI
2 yrs
 Establishment Phase: 49% FDI 2 yrs
 Mature Phase: 100% FDI 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
32
Agenda
Indian retail
The change factor
Why and why not FDI ?
How FDI ?
Case study : Chinese retailing
Recommendations
33
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
34
Total wholesale and retail
37 trade
5
30
US$ bn
0
22
5 FDI in retail
150 allowed
75
7 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0
8 0 5 0 1 2 3 4 5 6 7 8 9 0 1 2
Years
 Retail sales grew @ 19.6% CAGR for the next 4 years

after the introduction of FDI in 1992
35
China: The effect of FDI
Type No. of stores in No. of stores in
1996 2001
Traditional 1,920,604 2,565,028
Supermarkets 13,079 152,194
Convenience 18,091
Hypermarkets 593
 Modern formats have grown after FDI

 But so have traditional players
36
Employment in retailing is
increasing
Employment in Retailing
60 8.00%
7.00%
50
% of Total Labor
wholesale (Mn)
Employment in
6.00%
Retail and
40 5.00%
force
30 4.00%
3.00%
20
2.00%
10 1.00%
0 0.00%
90 91 92 93 94 95 96 97 98 99 00 01
Year
Employment %
Source : China Statistical Yearbook 2001

37
 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
Chinese people
retailing  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

38
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
Lessons  Employment growth
from China  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
39
Agenda
Indian retail
The change factor
Why FDI ?
How FDI ?
Recommendations
40
Recommendations
 Grant industry status to retail
 Permit FDI in Retail in phases
 Invest in supply chain infrastructure
 Ease distribution – infrastructure
creation, octroi
Recommend
 Ensure single window clearance for
retail chains
ations  Organize market for real estate
 Ensure proper rent laws
 Enforce zoning laws and city

development plan
 Increase land supply
 Ensure flexibility of labor laws
41
THANK YOU
42

Foreign Direct Investment in Retail: February 23, 2004

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Foreign Direct Investment in

February 23, 2004

The change factor

FDI in Indian retailing

Case study : Chinese retail

The change factor

FDI in Indian retailing

Case study : Chinese retail

US$ 6.6 trillion sales annually

 Still evolving as an industry

 India’s two largest retail player

 Carrefour, Ahold, Home Depot,

*Fortune List of world’s top companies

The change factor

FDI in Indian retailing

Case study : Chinese retail

 Difficulty in enforcing tax

 Formal Retailing Sector

 Greater enforcement of taxation

 RPG group: Food World, Health

and Glow, etc

 Specialty Chains (Ikea)

 Traditional Format Retailers

 Exclusive /Multiple Brand Outlets

The change factor

FDI in Indian retailing

Case study : Chinese retail

annum over last decade

 Easier consumer credit

 Greater variety and quality at all

 More discerning and demanding

Indian  No longer need-based shopping

 Post Liberalization children coming

than 500 Sq. ft.

would enjoy rapid growth

*FromICICI Retail Report

 Lack of exposure to global best

 Wholesale system under-invested

 Non level playing field issues

Zoning laws also vary from state

RE issues and fragmented private holdings

 Stamp Duty and registration

 Growth determining factors

Growth  GDP growth

factors  Employment generation and job

Implies greater purchasing power

 Least saturated of all global

size, excellent potential for foreign

 India ranked 3rd in the Global A T

The change factor

FDI in Indian retailing

Case study : Chinese retail

sector, except in:

 Hi-Tech items / items requiring

specialized after sales service

 Proposal faced strong opposition

 Entities established prior to 1997

 51:49 JV between RPG and Dairy

and technology to local partner. Gets

Marks and Spencer, Mango

 100% FDI permitted

 Metro Cash n Carry

FDI in Indian retailing