FDI in Multi-brand Retail (Issues and Challenges)

FDI in Multibrand retail

The commitment of money or

capital to purchase financial

instruments or assets in order to

gain profitable returns.


Refers to the physical Investment made by a foreign investor belonging to a certain country into a sector of foreign nation. It is the transfer of foreign assets into a country’s financial account. This can be done in four ways :

1. By acquisitions and mergers

2. By incorporating a wholly owned subsidiary

3. By being part of a joint venture and

4. By acquiring at least 10% share in the domestic company

If the share acquisition is less than 10% then it wouldn’t be called FDI then it would be known as PORTFOLIO INVESTMENT.


Investment done by citizens and government of one country (home country) invest in

industries of another country (host country).

Foreign Investment

through

Foreign Direct

Investments

Foreign Institution

al Investors


RETAILINGRETAILINGIn 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

It is the interface between the producer and the individual consumer buying for personal consumption.

This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers.

Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.


Front End Operations

Front End Operations

Back End Operations

Store Operations

MerchandisingLogistics &

DistributionsMarketing

Procurement/ Purchase

Corporate Services


RETAIL SECTORRETAIL SECTOR


FDI Policy In Indian Retail SectorFDI Policy In Indian Retail Sector

Single Brand Retail Trading

Multi-Brand Retail Trading

100%

51%


FDI Policy InitiativesFDI Policy Initiatives1991: Up to 51% FDI allowed in priority sectors.

1997: 100% FDI allowed in cash & carry wholesale trading.

2003: Germany's Metro becomes the first foreign company to set up cash & carry

wholesale store in Bangalore.

2006: 51% FDI allowed in single brand retail, cash & carry wholesale trading

approvals eased.

2007: Wal-Mart announces agreement with Bharti Enterprise to set up wholesale

Joint Ventures.

2008: Tesco enters into an exclusive franchise agreement with Trent, retail arm

of the Tata group.

2009: Bharti-Walmart opens its first cash & carry wholesale store in Amritsar.

July 2010: Discussion paper on FDI in Multibrand retail trading published, evokes

mixed response. FDI in Multibrand retail

December 2010: Carrefour opens its cash & carry wholesale store in Delhi.

November 2011: India's central government announced retail reforms for both

multi-brand stores and single-brand stores. These market reforms

paved the way for retail innovation and competition with multi-

brand retailers such as Wal-Mart, Tesco as well single brand

majors such as Nike, and Apple.

December 2011: Under pressure from the opposition, Indian government placed

the retail reforms on hold till it reaches a consensus.

January 2012: India approved reforms for single-brand stores welcoming anyone

in the world to innovate in Indian retail market with 100%

ownership, but imposed the requirement that the single brand

retailer source 30 percent of its goods from India.


FDI POLICY- OVER THE YEARSFDI POLICY- OVER THE YEARS


The marketing of two or more similar and competing products, by the same firm under different and unrelated brands. While these brands eat into each others' sales, multi-brand strategy does have some advantages as a means of

1. Obtaining greater shelf space and leaving little for competitors' products.

2. Saturating a market by filling all price and quality gaps. 3. Catering to brand-switchers users who like to experiment with

different brands.

4. Keeping the firm's managers on their toes by generating internal competition.


In-principle approval granted for increase in FDI in single brand retail from 51% to 100% under the approval route. This is subject to, inter alia, the following conditions:

1. Products to be sold under the same brand internationally.

2. Foreign investor must be the owner of the brand.

3. Single brand retail would cover only products branded during manufacture.

4. For FDI above 51%, 30% sourcing must be from SMEs.


In–principle approval has been granted for FDI in multi-brand retail up to

51% under the approval route. This is subject to, inter alia, the following

conditions:

1. Minimum amount to be brought in by the foreign investor to be USD 100

million.

2. At least 50% of the total FDI must be invested in back-end infrastructure

(includes capital expenditure on all activities, excluding front-end units.

Excludes expenditure on land cost and rentals).

3. 30% procurement of manufactured/ processed products must be from

SMEs.

4.Government to have first right on procurement of agricultural products.


It means that global retailers such as Wal-Mart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity.

The issue arises that Wal-Mart, Carrefour and Metro already have stores in India but these are wholesale cash-and-carry stores where only institutions or Kirana shops can buy — not consumers.


WHY INDIA ????

1. We are the second highest producer of fruits and vegetables in the world but still we are not able to utilize it properly because of inadequate infrastructure facilities.

2. It will reduce pre-harvest wastage/losses and thus help control food inflation.

3. It will create 1.5 million more jobs in 5 years. Apart from the huge number of indirect employment.

4. It will increase competition which is always beneficial for the customer.

5. It will remove the middleman from the equation. It will reduce costs which in turn will reduce prices.


PROPOSAL AS FINALISED BY GOVERNMENTA decision has been taken by the Government to permit FDI in all products, in a calibrated manner, subject to the following conditions:

• FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with Government approval.

• Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. • Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.


• At least 50% of total FDI brought in shall be invested in 'back-end infrastructure’.

• At least 30% of the procurement of manufactured/ processed products shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation.

• Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.

• Government will have the first right to procurement of agricultural products.


• Indian retail sector :

Employs 8% (35 million) of the working population.

Could yield 12 to 15 million retail jobs in the coming

five years.

• Out of which organized segment is about 0.3 million.

• Retail sector grew at 9.4% on real terms & 15.4% on

nominal terms.


• FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand Retailing was, however, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010.

• FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997.

• Trade is an important segment in India's Gross Domestic Product (GDP).As per the National Accounts, released by the Central Statistical Organization (CSO), GDP from trade (inclusive of wholesale and retail in organized and unorganized sector), at current prices, increased from Rs 4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of 16.2 per cent.


• As per the National accounts, private final consumption expenditure, increased from Rs 19,26,858 crore in 2004-05 to Rs 32,26,826 crore in 2008-09, at an average rate of 13.8 per cent per annum However, expenditure on some items like transport and communication; expenditure on food in hotels and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation are distinct from trade.

• When seen at constant 2004-05 prices, however, private final consumption expenditure increased from Rs 19,26,858 crore in 2004-05 to Rs 26,51,786 crore at an average rate of 8.3 per annum.

• Private consumption expenditure adjusted for items like transport and communication etc. increased from Rs 11,92,045 crore in 2004-05 to Rs 16,67,286 crore in 2008-09, at an average rate of 8.8 per cent.


ISSUE 1 : FDI will provide employment-A MYTH1 FDI in multi-brand retail will lead to a mass scale loss and displacement of retail jobs. As per NSSO 64th Round 2007-08, retail trade employed 7.2% of total workers and provided job to 33.1 million. FDI in retail, definitely, will challenge the 12 million existing shops and 33.1 million employers.

The Commerce Minister says 40 lakh people will be directly employed. WalMart has 21 lakh employees worldwide. Their largest store has 214 employees. At this rate they have to open 18,000 stores in India. For Tesco or Carrefour, it is lesser; so there are 36,000 stores that need to be opened in 53 cities - that is 600 stores per city.

Wal-Mart has not been allowed to open a store in Manhattan. Even the New Yorkers realise that this would lead to closure of stores in Manhattan.

The entry of the trading giant, Wal-Mart, led to the closure of 40,000 USfactories between 2001 and 2007, resulting in throwing millions of people out of their jobs.


ISSUE 2: Condition of Farmers will get worsened


Multi Brand Retailers pay farmers and employees less.

They never reduce their profits. (EU parliament)

Instances about the potato farmers who are forced to throw their potatoes by McDonald’s which imports its own potatoes.

MBRs – Benefit Accrue large retailers who drive down the prices.(Chairman of AMUL)

“Yeh sarkar vikaas ki seedhi nahi, vinaash kar gaddha hai.” – Sushma Swaraj

ISSUE 3: Emergence Of Foreign Middlemen

There are instances where there are no middlemen in India. For example, in the sugar sector, the sugarcane farmers are contracted by sugar mills to sell their produce directly to the mills.

When FDI comes in India, MBR will act as new middlemen. To say that middlemen will no longer exist is totally wrong.

There may be many faults in our rural market (aarat) system that need fixing. But there is a bond of trust between the farmer and the traders in the market and that cannot be denied.

The traders (middlemen)are the farmer's traditional ATM.



ISSUE 4: FDI in retail - devil lies in the detail

No to front-end stores but welcome the foreign retail chains to open factories and warehouses.

MBR’s business will be confined to state allowing FDI only, self contradicting.

50% of FDI must find its way into back-end operations anywhere in India.

Parking and Connectivity – different kettle of fish.

Inverting Natural Sequence


ISSUE 5: The dubious benefits of FDI in retail

Wal-Mart faced allegations of bribery that helped it set up stores much ahead of its competitors within Mexico. This resulted in violation of Mexican law and the US Foreign Corrupt Practices Act.

The bargaining power of the global trading giant with the Governments is so high that it eventually puts pressure on State finances, through tax-breaks, effective outsourcing models to kill production jobs.

The savings due to shopping at Wal-Mart cannot compensate for the loss of job opportunities and income.

Foreign investment, in the last two decades, has contributed less than 5 per cent to the economy, while the real wealth creation has come from the household sector, which includes proprietary and partnership firms.

ISSUE 6: 100% FDI in Cold Storage- A Dream Wastage

Wastage as per 2010, 25-30% in fruits and vegetables and 5-7% in food grains.

80 million toons of fruits and vegetables go to waste due to lack of cold storages.


ISSUE 7: FDI- 21st East India Company

Remember East India Company. It entered India as a trader and then took over politically.


ISSUE 8: FDI, a welcome to Chinese Market

Sooner or later, Giant retailers will import from CHINA to lower down the cost of products.

According to the US Census, between 1992 and 2007, the imports from China to US tripled in value from $9 billion to $27 billion! According to the US Census.



In Retail, over 70 per cent of the labor force in both sectors combined

(organized and unorganized) is either illiterate or educated below the

primary level.


COMPETITIONCOMPETITIONA strong competition from mom and pop shops:-

Easily accessible & approachable.

Provide services like Free home delivery and goods on credit.

They change consumer focus.

MARKET POWERMARKET POWERPotential of Indian Market is US$ 200 billion whereas India is just earning its 3%.


• TAXATION & STRINGENT APPROVALSTAXATION & STRINGENT APPROVALS•Taxation laws in India favors only small retail businesses.•Implementation of non-uniform VAT across states.•Octroi and entry tax in some states.

•INFLATION EFFECT ON INDIAN RETAIL INDUSTRYINFLATION EFFECT ON INDIAN RETAIL INDUSTRY

Disturbed economic status.

Challenge to get more customers

at low cost.

Liquidity pressure

1. OPPORTUNITIES GALORE.

2. BENEFITS FOR FARMERS.

3. IMPROVED TECHNOLOGY AND LOGISTICS.

4. IMPACT ON REAL-ESTATE DEVLOPMENT.


1. Domestic companies may lose their ownership to overseas companies.

2. Small enterprise may not compete with the foreign players and may ultimately be edged out of business.

3. Large giants of the world may monopolies the highly profitable sector.


In the final analysis, for India, FDI in multi-brand retail should be seriously considered by the government and, as with many other sensitive sectors (like defense), a gradual opening up could be made possible. Despite country wide speculation on the plight of small retailers, India needs to take a lesson from China where organized and unorganized retail seem to co-exist and grow together.

In our view, the government has an opportunity to utilize the

liberalization for achieving certain of its own targets: improve its infrastructure; access sophisticated technologies; generate employment for those keen to work in this sector FDI would lead to a more comprehensive integration of India into the worldwide market and, as such, it is imperative for the government to promote this sector for the overall economic development and social welfare of the country. If done in the right manner, it can prove to be a boon and not a curse.



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FDI in Multi-brand Retail (Issues and Challenges)