Fdi in Indian Retail Sector free essay sample

What is FDI Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. What is Retailing Retailing is a distribution channel function where one organization buys products from supplying firms or manufactures the product themselves, and then sells these directly to consumers. A retailer is a reseller (i. . , obtains product from one party in order to sell to another) from which a consumer purchases products. Indian Retail Sector Indian retail industry is the largest industry in India, with an employment of around 8% and contributing to over 10% of the countrys GDP. According to this year’s Global Retail Development Index, India is positioned as the leading destination for retail investment. We will write a custom essay sample on Fdi in Indian Retail Sector or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page There are about 300 new malls, 1,500 supermarkets and 325 departmental stores being built in the cities very soon. The Indian retail sector is now worth about $250bn (? 140bn) a year, but it is heavily underdeveloped. Well over 95% of the market is made up of small, uncomputerised family-run stores. Now there are finally signs that the Indian government is dropping its traditionally protectionist stance and opening up its retail market to greater overseas investment. Recently it eased restrictions on foreign investment, allowing overseas retailers to own 51% of outlets as long as they sell only single-brand goods. A shopping revolution is ushering in India where, a large population between 20-34 age groups in the urban regions is boosting demand by 11. 1 percent in 2004-05 to an Rs 23,308 purchasing power. This has resulted in huge international retail investment and a more liberal FDI. Evolution of Indian Retail The era of Indian retail began with weekly markets and village fairs, which catered to the daily necessities of villagers. Village fairs were larger in size with a wide variety of goods sold from food, clothing, cosmetics and small consumer durables. Then came the emergence of Kirana stores and mom-and-pop stores. These stores used to cater to the local people. This was followed by the era of government supported rural retail and many indigenous franchise stores came up with the help of Khadi Village Industries Commission. The KVIC has a countrywide chain of 7000 plus stores in India. The Modern era has a host of small and large formats with exclusive outlets showcasing a complete range of products. The department stores and shopping malls targeting to provide a complete destination experience for all segments of the society. The hyper and super markets are consistently trying to provide the customer with the 3 Vs (Value, Variety and Volume). Classification of Indian Retail Sector The Indian retail sector is broadly classified into the organized sector (modern retailers) and the un-organized sector (traditional retailers). The organized sector refers to licensed retailers, that is, those who are registered for sales tax, income tax, etc and primarily consist of Hypermarkets, Supermarkets, Multi Brand Outlets, Department Stores, Malls and Discount Stores. The un-organized sector on the other hand, refers to the traditional formats of low-cost retailing requiring limited investment such as hand cart and pavement vendors, mobile vendors, the local kirana shops and local village fairs and melas. Categories of the Retail Sector The Indian retail sector is extremely fragmented, with over 12 million outlets across all sectors. These are typically small family owned over-the-counter stores with an average size of 100 square feet. Organised retail is mostly developed in segments such as clothing (14% organised), watches (40%) and footwear (25%). The major players in these sectors have set up labelled stores in order to differentiate their brands. However, some of the largest segments such as food (1% organised retail) and jewellery (2%) are barely organised, thus contributing to the low overall average. Fastest growing retail segment Watches and jewellery – 18% Furniture and fixtures – 27% Clothing – 55% Durables – 18% Food and grocery – 91%Pharmacy – 27% (Source: India’s Retail Survey 2005, KPMG) Estimated Growth in 4 largest segments (US $ mn): 20022007CAGR* (%) Food †¢ Chain stores †¢ Single large stores391 326 651624 1462 16233% 35% 20% Clothing †¢ Manufacturer retailers †¢ Chain stores †¢ Single large stores1075 293 315 4672266 590 852 824 16% 15% 22% 12% Consumer durables †¢ Manufacturer retailers †¢ Chain stores †¢ Single large stores 359 141 98 120 822 284 298 24018% 15% 25% 15% Books Music †¢ Chain stores †¢ Single large stores 97 54 43 310 22 10826% 30 20% Source: Economic Times Retail Knowledge Series Compound annual growth rate Changing Indian Consumer Over the years, as a result of the increasing literacy in the country, exposure to the west, satellite television, foreign magazines and newspapers, there is a significant increase of consumer awareness among the Indians. Today more and more consumers are selective on the quality of the products/services. This awareness has made the Indian consumers seek more and more reliable sources for purchases such as organized retail chains that have a corporate background and where the accountability is more pronounced. The consumer also seeks to purchase from a place where his/her feedback is more valued. Indian consumers are now more aware and discerning, and are knowledgeable about technology, products and the market and are beginning to demand benefits beyond just availability of a range of products that came from ‘trusted’ manufacturers. Purchasing power of Indian urban consumer is growing and branded merchandise in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food and even Jewellery, are slowly becoming lifestyle products that are widely accepted by the urban Indian consumer. Shopping in India has witnessed a revolution with the change in the consumer buying behaviour and the whole format of shopping also altering. Industry of retail in India which has become modern and can be seen from the fact that there are multi- stored malls, huge shopping centres, and sprawling complexes which offer food, shopping, and entertainment all under the same roof. India’s Top Retailers Pantaloon Retail (India) It is headquartered in Mumbai with 450 stores across the country employing more than 18,000 people. It can boast of launching the first hypermarket Big Bazaar in India in 2001. An all-India retail space of 5 million sq. ft. which is expected to reach 30 mn by 2010. It is not only the largest retailer in India with a turnover of over Rs. 20 billion but is present across most retail segments Food grocery (Big bazaar, Food bazaar), Home solutions (Hometown, furniture bazaar, collection-i), consumer electronics (e-zone), shoes (shoe factory), Books: music gifts (Depot), Health Beauty care services (Star, Sitara and Health village in the pipeline), e-tailing (Futurbazaar. com), entertainment (Bowling co. ) K Raheja Group They forayed into retail with Shopper’s Stop, India’s first departmental store in 2001. It is the only retailer from India to become a member of the prestigious Intercontinental Group of Departmental Stores (IGDS). They have signed a 50:50 joint venture with the Nuance Group for Airport Retailing. Shoppers Stop has 7, 52, 00 sq ft of retail space with a turnover of Rs 6. 75 billion. The group has announced plans to establish a network of 55 hypermarkets across India with sales expected to cross the US$100 million mark by 2010. Lifestyle Growing from one store in Bahrain in 1973, the NRI-led Landmark Group today operates over 5 million sq ft in the Middle East and India. The group’s first Lifestyle store in India opened in Chennai in 1999. Now it has 325,000 sq ft in Chennai, Hyderabad, Bangalore, Gurgaon and Mumbai. Its first hypermarket, branded as ‘Max’, is expected to open soon. Reliance Retail Mukesh Ambani’s 15,000-people Reliance Retail has opened 250 convenience stores, branded as ‘Fresh’, across the southern states. It is now planning to launch 30 such outlets in Mumbai. Reliance Retail plans to invest Rs 25,000 crore on hypermarkets, supermarkets and specialty stores in the next four years. The first hypermarket will be up in Ahmadabad by the end of July. Aditya Birla Retail The company, which will operate under the brand ‘More’, has selected two formats — hypermarkets and supermarkets — for its initial foray. The first store has opened in Pune. Last January, the company acquired Trinethra Super Retail, which has given it more than 5,00,000 sq ft and a strong presence in the South. The Birla’s outlay for the business over the next three years is Rs 9,000 crore. Anticipated Growth of Indian Retail Sector India has been topping the AT Kearneys annual Global Retail Development Index (GRDI) for three consecutive years, thus presenting itself as an attractive market for retail investment. The Indian retail market is the fifth largest retail destination globally. According to leading industry estimates, the Indian retail is estimated to grow from the US$ 412 billion in 2008 to US$ 483 billion by 2010 and $860 billion by 2018. In the same manner; modern retail, presently accounting for 4 per cent of the total market, is likely to increase its share to 25 per cent by 2018. The future outlook of the Indian retail market appears to be bright, with Euro monitor expecting the Indian Retail market to grow in value terms by a total of 39. 6 per cent between 2006 and 2011, averaging growth of almost 7 per cent a year. BMI (Business Monitor International) is anticipating the strongest growth in India’s hypermarket sector, with sales set to grow by an explosive 1025% to reach US$1. 35bn in 2011. Supermarket sales will increase by 119. 1%, discount stores by 242. 9% and convenience stores by 134. 1%. Reasons for Growth This anticipated growth of the Indian retail sector is owing to the following factors, which include favourable demographics, rising consumer incomes, real estate developments, availability of better sourcing options both from within India and overseas and changing lifestyle. The retail sector in India is highly fragmented and unorganised and two thirds of the sector’s output coming from this area which require minimal rental costs, cheap labour and negligible overheads and taxes, these factors of the unorganized retail sector is reasons for growth of the entire retail sector. India is witnessing a change in the age and income profiles of its over 1 billion population, which is likely to fuel accelerated consumption in the years to come. Besides, the gradual disintegration of the traditional Indian joint family system has led to nuclearisation of families, which in turn has led to enhanced demand. More Indian households are getting added to the consuming class with the growth in income levels. This large base of households with growing disposable income is expected to drive demand for organised retail. In addition increase in the number of international brands available in the Indian market, economic implications of the government, increasing urbanization, credit availability, improvement in the infrastructure, increasing investments in technology and real estate building a world class shopping environment for the consumers, falling real estate prices, increase in expenditure for luxury items have all reasons for growth of the sector. FDI in Indian Retail Sector FDI in India are approved through two routes: ?Automatic approval by RBI Foreign Investment Promotion Board (FIPB) recommendation’s of FDI FDI in India was initiated in 1992, streamlining of the procedures and substantial liberalization has been done since 1995. India at present allows 100% FDI in the wholesale cash-and-carry business (operating on a basis of cash payment for goods that are taken away by the purchaser) and 51% FDI in single-brand retailing. No foreign equity, however, is permitted in multi-brand reta iling these companies are only allowed to give logistical support to domestic multi-brand retail companies. As FDI’s influence on the Indian retail sector sets in, the total size of the retail trade is expected to grow extensively in the coming years and the consumer segments patronizing the big malls will create frenzy for organized retailing predicting a growth of 25-30 per cent per annum over the next decade. Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing thereby, leading to new economic opportunities and creating more employment generation. FDI over the years in the Indian retail sector has seen an impressive growth. In 2007-08, India’s FDI touched US$ 25 billion, up 56 per cent against US$ 15. 7 billion in 2006-07. In 2005-06, the growth was even sharper at 184 per cent, up from US$ 5. 5 billion in 2004-05. Projections say that the country will attract US$ 35 billion in FDI in 2008-09 (as per data released by the Ministry of Commerce and Industry). Investment in Indian Retail Sector *2008-09 projected figures; Figures in US $ billion International Retailers in India International retail brands like Wal-Mart, GAP, JC Penney and Target have doubled their sourcing operations from India. Since quotas were dismantled early last year, new entrants like Steve Barry’s are cashing in on the cost advantage and setting up their entire operations in India. Put together, Wal-Mart, JC Penney, GAP and Target account for 50% of the apparel outsourced from India in ’05. While Target, the US-based value retail chain is looking to triple its business from India to $300m from $120m in ’03, GAP is looking to touch about $650m, from $500m last year. Wal-Mart already outsources over $1bn worth of supplies from India. These companies are now rationalising their vendor bases and limiting their sourcing from fewer countries like India and China. India is specialising in value-added products unlike China which produces larger volumes. American retail chain Steve Barry’s University Sportswear has made India its procurement hub since ’01 through its affiliate company 4004 Incorporated. They supply about 20m units annually to the company, and are able to cut costs by 40-60%. Mast Industries, which procures for the $2bn Limited Brands which includes Victoria’s Secret, The Limited, Express and Bath Body Works among others, does $40m worth of business from India. It is looking to double its business in the next year. French Connection, UK (FCUK) is also sourcing 30m worth of apparel from India, which accounts for 35% of its business. A number of these retail chains are already eyeing the Indian market, and once they are allowed it would help them to further increase their sourcing from India. Benefits of Foreign Direct Investment in the Indian Retail Sector Gradual opening up of the retail segment for FDI wil l work to the advantage to government, consumers and existing retailers in the following manner. ?Generate huge employment for the semi-skilled as well as illiterate population, which will ultimately increase the per capita income and increased tax paying population. Indirect employment generation channel by training and employing people in the transportation and distribution sectors such as drivers, mechanics etc. ?Increased investment in technology in the form of cold storage chains, food processing sector as well as better operations in production cycle and distribution will decrease the wastage to a considerable mount. ?Traditional retailers can use this situation in their favour by taking franchisees of the mega players of this industry. ?The indirect benefits like better roads, online marketing, expansion of telecom sector etc. ill give a ‘big push’ to other sectors like agriculture, small and medium size enterprises. ?The consumer gains from the wide variety of c hoices and a more diversified basket of prices available under one roof. ?The huge tax revenue generated from these retail giants will gradually wipe out the ugly looking fiscal and revenue deficits. ?The transaction in foreign currencies by these MNCs will create a balance in exchange rate and will bring in stable funds in the economy as opposed to FIIs. ?Gains would flow from higher exports when the global chains are allowed in other sectors such as readymade garments. As for monopolistic pricing practices, the best safeguard would be in permitting all global chains to set up shops. The competition among them (as has happened in the automobile industry) would ensure better prices for consumers and suppliers alike. Role of government in the Indian Retail Sector Despite the benefits received by the government from the retail sector, which is illustrated by the below figure, The government has no plans to change the present policy on foreign direct investment in retail, as it seeks to afeguard small retailers from adverse impact of growing organised retail. Policy makers say retail is the second largest employer after agriculture and the government does not want to antagonise the labour-intensive sector, particularly at a time when the economy is facing a slowdown. Concerns Regarding FDI ?Foreign Players would displace the unorganized retailers because of their superior financial strengths. ?The entry of large global retailers such as Wal-Mart would k ill local shops and millions of jobs. The global retailers would collude and exercise monopolistic power and promote cartels to raise prices and reduce the prices received by the suppliers where by both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. ?Induce unfair trade practices like predatory pricing, in the absence of proper regulatory guidelines. ?Give rise to cut throat competition rather than promoting incremental business. It would lead to lopsided growth in cities, causing discontent and social tension elsewhere. Increase in real estate prices and marginalize domestic entrepreneurs. Most competitive spot in Indian Retailing The most competitive spot in present retailing is definitely the food and mobile communication. There is a huge competition in both of these. As the modern retail sector in India is reflected in sprawling shopping centres, multiplex- malls and huge commercial complexes offer shopping, food and enter tainment all under one roof, the concept of shopping has changed in terms of new trends and consumer buying behaviour, lead to a revolution in retail sector or shopping in India. The market players continuously come up with the offer of lowest possible price to drive sales and to survive in the cut throat competition. Some of the major players in food retailing are- Reliance Fresh, Kishore Biyanis Food Bazaar, Aditya Birla Groups, Piramyds Tru Mart, ITCs Choupal, Subhiksha and many more. The major players in the newly discovered and rapidly growing mobile retailing based on advanced retailing formats include- Vodafone Essars Mobile Store, Bharti telecom, Spice Telecoms Hot Spot, Future Groups M- Bazaar, Reliance Info comm. Subhiksha Mobile, Tata Indicom and many more. Why India as a FDI Destination The trends that are driving the growth of the retail sector in India are ? Low share of organized retailing ?Falling real estate prices ?Increase in disposable income and customer aspiration ?Increase in expenditure for luxury items Other credible factor in the prospects of the retail sector in India is the increase in the young working population. In India, hefty pay packets, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector. These key factors have been the growth drivers of the organized retail sector in India. Future Steps of FDI in Indian Retail Sector India has emerged as the most attractive destination for global retailers amongst emerging markets. The government is now set to initiate a second wave of reforms in the segment by liberalizing investment norms further. This will not only favour the retail sector develop in terms of design concept, construction quality and providing modern amenities but will also help in creating a consumer-friendly environment. Retail industry in India is at the crossroads but the future of the consumer markets is promising as the market is growing, government policies are becoming more favourable and emerging technologies are facilitating operations in India. And this upsurge in the retail industry has made India a promising destination for retail investors and at the same time has impelled investments in the real estate sector. As foreign investors cautiously test the Indian Markets for investments in the retail sector, local companies and joint ventures are expected to be more advantageously positioned than the purely foreign ones in the evolving Indias organized retailing industry. CASE STUDY: BHARTI-WALMART DEAL Indias Bharti group and Wal-Mart, the worlds largest retailer, opened their first cash-and-carry joint venture store on an investment of $7 million. They also plan to open at least 15 outlets across the country in the next three years. The stores will be run under the brand name of Best Price Modern Wholesale. It will offer an assortment of around 6,000 items, including food and non-food items, at competitive wholesale prices. Over 90 per cent of the goods will be sourced locally, helping keep down costs. This deal will provide employment for 5,000 people. They are planning to establish ventures in Punjab, Haryana, Uttar Pradesh and Madhya Pradesh. In addition, Bharti Enterprises’ 100% subsidiary Bharti Retail, that will own and manage the retail stores, has entered into a franchise agreement with Wal-Mart which will provide technical support to Bharti Retail. Bharti Wal-Mart Private Limited will bring modern supply chain and back-end logistics expertise to India, bringing Wal-Mart’s global best practices in such areas as just-in-time inventory, retail information systems, cold chain infrastructure, GPS for truck and trailer tracking, and fuel management systems. This deal is a paradigm to say that India is alluring the top foreign brands to invest in the retail sector and is turning out to be a hot spot for retail investment. Conclusion: The retail industry in India has a very bright future prospect. It is expected to enrich the Indian economy and employment generation. Investing in organised retail sector in India is a beneficial scheme for an investor. The Retail industry is going to be the next boom industry after IT. Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing thereby, leading to new economic opportunities and creating more employment generation.