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Foreign Direct Investment in Retail

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Nike, Reebok, Zodiac etc. Multi-brand outlets. Vijay Sales, Viveks etc. Manufacturers/ Exporters ... Case study : Chinese retail. Recommendations. 13. Greater ... – PowerPoint PPT presentation

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Title: Foreign Direct Investment in Retail


1
Foreign Direct Investment in Retail
  • February 23, 2004

2
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
3
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
4
Retailing An overview
  • Retailing
  • Worlds largest private industry
  • US 6.6 trillion sales annually
  • Indian retailing
  • Largest employer after agriculture - 8 of
    population
  • Highest outlet density in world
  • Around 12 mn outlets
  • Still evolving as an industry
  • Long way to go

An overview
www.etretailbiz.com/dec2002
5
Retailing An overview
  • Wal-Mart
  • Topmost global Fortune 500 company(3 Consecutive
    Years)
  • Annual Sales of over US 250 bn
  • Indias two largest retail player turnover around
    US 158 mn (Bata) and US 102 mn (Shoppers Stop)
  • Fortune 100
  • 9 Retailers
  • Carrefour, Ahold, Home Depot, Kroger, Metro,
    Kmart-Sears, Target, Albertsons

An overview
Fortune List of worlds top companies Euromoni
tor India Retail Survey
6
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
7
Evolution of Indian retail
Modern Formats/ International
Traditional/Pervasive Reach
Government Supported
Historic/Rural Reach
Exclusive Brand Outlets Hyper/Super
Markets Department Stores Shopping Malls
PDS Outlets Khadi Stores Cooperatives
Convenience Stores Mom and Pop/Kiranas
Weekly Markets Village Fairs Melas
Source of Entertainment
Availability/ Low Costs / Distribution
Shopping Experience/Efficiency
Neighborhood Stores/Convenience
8
Evolution of Indian retail
  • Informal retailing Sector
  • Typically small retailers.
  • Evasion of taxes
  • Difficulty in enforcing tax collection
    mechanisms
  • No monitoring of labor laws
  • Formal Retailing Sector
  • Typically large retailers
  • Greater enforcement of taxation mechanisms
  • High level of labor usage monitoring

Indian retail
9
Categories of Indian retail
  • Corporate Houses
  • Tatas Tata Trent
  • RPG group Food World, Health and Glow, etc
  • ITC Wills Life Style
  • Rahejas(ShoppersStop), Hiranandani(Haiko),
    DLF(DT cinemas) etc.
  • Dedicated brand outlets
  • Nike, Reebok, Zodiac etc
  • Multi-brand outlets
  • Vijay Sales, Viveks etc
  • Manufacturers/ Exporters
  • Pantaloons, Bata, Weekender

Indian retail
10
Classifying Indian retail
  • Modern Format retailers
  • Supermarkets (Foodworld)
  • Hypermarkets (Big Bazaar)
  • Department Stores (S Stop)
  • Specialty Chains (Ikea)
  • Company Owned Company Operated
  • Traditional Format Retailers
  • Kiranas Traditional Mom and Pop Stores
  • Kiosks
  • Street Markets
  • Exclusive /Multiple Brand Outlets

Indian retail
11
Large Indian retailers
  • Hypermarket
  • Big Bazaar
  • Giants
  • Shoprite
  • Star
  • Department store
  • Lifestyle
  • Pantaloons
  • Piramyds
  • Shoppers Stop
  • Trent
  • Entertainment
  • Fame Adlabs
  • Fun Republic
  • Inox
  • PVR

Indian retailers
12
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
13
The changing Indian consumer
  • Greater per capita income
  • Increase in disposable income of middle class
    households
  • 20.9 growth in real disposable income in
    99-03.
  • Growing high and middle income population
  • Growing at a pace of over 10 per annum over
    last decade
  • Affordability growth
  • Falling interest rates
  • Easier consumer credit
  • Greater variety and quality at all price points

Indian consumer
From Euromonitor Retail Survey
14
The changing Indian consumer
  • The urban consumer
  • Getting exposed to international lifestyles
  • Inclined to acquiring asset
  • More discerning and demanding than ever
  • No longer need-based shopping
  • Shopping is a family experience
  • Changing Mindset
  • Increasing tendency to spend
  • Post Liberalization children coming of age
  • 100 mn 17-21 year olds. Tend to spend freely.
  • Greater levels of education

Indian consumer
Data from NCAER
15
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
16
Industry dynamics
  • Low domestic competition
  • Because of fragmented nature of industry
  • Lack of exposure to global best practices
  • Low entry barriers for unorganized retailing
  • Moderate entry barriers for organized retailing
  • Wholesale system under-invested leading to 20-40
    wastage
  • Non level playing field issues
  • Wide differences in treatment of small and large
    retailers

Industry dynamics
17
Real estate issues
  • Highly distorted real estate market
  • Pro-tenant laws
  • Zoning laws
  • Zoning laws also vary from state to state
  • Non-availability of government land, and
    fragmented private holdings makes it difficult
    for retailers to acquire land
  • Government is largest property owner in country
  • Urban Land Ceiling act is archaic
  • Stamp Duty and registration charges at high
    levels. Also vary from state to state

RE issues
18
Growth factors
  • Growth determining factors
  • Government Policy
  • Infrastructure development
  • GDP growth
  • Employment generation and job creation
  • In several new sunrise industries
  • Implies greater purchasing power

Growth factors
19
The Indian advantage
  • India ranked 5th in the Global A.T Kearney Retail
    Development Index
  • Second only to China in Asia
  • Least saturated of all global markets studied
  • The least competitive of all global markets
    studied
  • Implies lower barriers of entry for global
    players
  • Considering tremendous market size, excellent
    potential for foreign players
  • India ranked 3rd in the Global A T Kearney FDI
    Confidence Index in 2004
  • Improved from Rank 6 in Year 2003

Advantage India
20
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
21
FDI in Indian retailing
  • Current Indian FDI Regime
  • FDI not permitted in retail trade sector, except
    in
  • Private labels
  • Hi-Tech items / items requiring specialized
    after sales service
  • Medical and diagnostic items
  • Items sourced from the Indian small sector
    (manufactured with technology provided by the
    foreign collaborator)
  • For 2 year test marketing (simultaneous
    commencement of investment in manufacturing
    facility required)

FDI in Retail not permitted
22
FDI in Indian retailing
  • Metro Group of Germany
  • Cash-and-carry wholesale trading
  • Proposal faced strong opposition
  • Entities established prior to 1997
  • Allowed to continue with their existing foreign
    equity components.
  • No FDI restrictions in the retail sector pre-1997
  • Foodworld
  • 5149 JV between RPG and Dairy Farm
    International,
  • Leading food retailer in India now
  • Mc Donalds

Current FDI
23
International retailers in India Strategies
  • Franchise
  • International company gives name and technology
    to local partner. Gets royalty in return
  • In case master franchise is appointed for region
    or country, he has right to appoint local
    franchisees
  • Nike, Pizza Hut, Tommy Hilfiger, Marks and
    Spencer, Mango
  • Manufacturing
  • Company sets up Indian arm for production
  • Bata India. It also has right to retail in India

How they are present
24
International retailers in India Strategies
  • Distribution
  • International company sets up local distribution
    office
  • Supply products to Indian retailers to sell
  • Also set up franchised outlets for brand
  • Swarovski, Hugo Boss
  • Wholesale trading
  • Cash and Carry operations
  • 100 FDI permitted
  • Metro Cash n Carry

How they are present
25
Agenda
Retailing An overview
Indian retail
FDI in Indian retailing
Why FDI ?
How FDI ?
Incentives for FDI
Case study Chinese retail
Recommendations
26
Why FDI?
  • Improve competition
  • Develop the market
  • Greater level of exports due to increased
    sourcing by major players
  • Sourcing by Wal-Mart from China improved
    multifold after FDI permitted in China
  • Similar increase in sourcing observed for Metro
    in India
  • Provides access to global markets for Indian
    producers

Benefits of FDI
27
Why FDI?
  • Investment in technology
  • Cold storage chains solve the perennial problem
    of wastage
  • Greater investment in the food processing sector
    technology
  • Better operations in production cycle and
    distribution
  • Better lifestyle
  • Greater level of wages paid by international
    players usually
  • More product variety
  • Newer product categories
  • Economies of scale to help lower consumer price
  • Increased purchasing capacity of consumers

Benefits of FDI
28
Why FDI?
  • Manpower and skill development
  • Through retail training and
  • Greater managerial talent inflow from other
    countries
  • Tourism Development
  • A strong retailing sector boosts tourism as seen
    from the experience of Singapore and Dubai
  • Investment in whole supply chain
  • Improved product basket from India for exports
  • Long term benefits
  • Up-gradation of agriculture
  • Development of efficient small and medium size
    industries

Benefits of FDI
29
Benefits to the government
30
Benefits to the government
  • Increase employment levels
  • FDI would result in market growth and expansion
  • Employment generated at various levels
  • Increased consumer demand implies employment
    generation across the value chain
  • Does not need very high skill sets
  • Needs high school graduates and other similar
    skill levels
  • Currently this is a majorly unemployed
    demographic group
  • Boom in employment
  • Similar to job generation in ITES industry
  • On a much larger scale
  • But new jobs comparatively lower down the value
    chain

Benefits to govt.
31
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
32
How FDI ?
  • FDI should be allowed in stages
  • Initial stages 26 FDI
  • Establishment Phase 49 FDI
  • Mature Phase 100 FDI
  • FDI policy
  • No incentives needed to attract FDI
  • Market size and potential are sufficient inducers
  • No need for costly tax breaks, import duty
    exemptions, land and power subsidies, and other
    enticements

2 yrs
2 yrs
How FDI ?
2 yrs
33
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
34
Case study Chinese retailing
  • FDI permitted in 1992. 40 foreign retailers have
    secured approval
  • Retail sales have grown_at_13.5 CAGR since FDI was
    permitted
  • FDI initially restricted to 6 major cities
    (including Beijing, Shanghai and Guangzhou) and
    SEZs
  • Foreign ownership initially restricted to 49
  • US 22 bn of FDI attracted, 3.6 of total FDI
  • In 2003, FDI in wholesale and retail was US 1.1
    bn (Around 30 of our total FDI in 2003)
  • Current restrictions on FDI will be phased out
    over 5 years as condition of WTO entry

Chinese retailing
35
Total wholesale and retail trade
375
300
US bn
225
150
75
9 2
7 8
8 0
8 5
9 0
9 1
9 3
9 4
9 5
9 6
9 7
9 8
9 9
0 0
0 1
0 2
Years
  • Retail sales grew _at_ 19.6 CAGR for the next 4
    years after the introduction of FDI in 1992

36
China The effect of FDI
  • Modern formats have grown after FDI
  • But so have traditional players

37
Employment in retailing is increasing
Source China Statistical Yearbook 2001
38
Case study Chinese retailing
  • Walmart
  • Entered Chinese market in 1996
  • Has 43 stores in 19 cities as on date
  • Had sales of US 704 mn in 2003
  • Has employed more than 20,000 people
  • Has paid taxes of US 111 mn in total
  • Carrefour
  • Has 54 stores as on date
  • Had sales of US 1.6 bn in 2003

Chinese retailing
Source company websites
39
Lessons from China
  • Strong evidence in favor of FDI
  • FDI improves the entire size of the industry
  • Retailing in China has grown at a compound rate
    of 15 per annum after FDI inflow
  • Employment growth
  • Evolution of modern formats
  • Local players can survive and even beat foreign
    competition
  • Need for a strong retailing industry in India
  • Scale is the key to success for local retailers

Lessons from China
40
Agenda
Retailing An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study Chinese retail
Recommendations
41
Recommendations
  • Grant industry status to retail
  • Permit FDI in Retail in phases
  • Invest in supply chain infrastructure
  • Ease distribution infrastructure creation,
    octroi
  • Ensure single window clearance for retail chains
  • Organize market for real estate
  • Ensure proper rent laws
  • Enforce zoning laws and city development plan
  • Increase land supply
  • Ensure flexibility of labor laws

Recommendations
42
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