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Foreign Direct Investment inRetail
February 23, 2004
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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3
Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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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 industryLong way to go
An overview
Retailing: An overview
*www.etretailbiz.com/dec2002
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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
Retailing: An overview
*Fortune List of worlds top companies
**Eurom oni tor India Retail Survey
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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Weekly Markets
Village FairsMelas
Convenience StoresMom andPop/Kiranas
PDS OutletsKhadi Stores
Cooperatives
Exclusive BrandOutletsHyper/Super MarketsDepartment StoresShopping Malls
Traditional/Pervasive Reach
GovernmentSupported
Historic/RuralReach
Modern Formats/International
Evolution of Indian retail
Source ofEntertainment
NeighborhoodStores/Convenience
Availability/ LowCosts /
Distribution
ShoppingExperience/Efficiency
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Informal retailing Sector Typically small retailers.
Evasion of taxes
Difficulty in enforcing tax collectionmechanisms
No monitoring of labor laws
Formal Retailing Sector
Typically large retailers
Greater enforcement of taxation
mechanisms High level of labor usage monitoring
Indian retail
Evolution of Indian retail
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Corporate Houses
Tatas: Tata Trent
RPG group: Food World, Health andGlow, 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
Categories of Indian retail
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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
Classifying Indian retail
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Hypermarket
Big Bazaar Giants
Shoprite
Star
Department store Lifestyle
Pantaloons Piramyds
Shoppers Stop
Trent
Entertainment Fame Adlabs
Fun Republic
Inox
PVR
Indianretailers
Large Indian retailers
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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Greater per capita income Increase in disposable income of middle
class households
20.9%* growth in real disposable income in99-03.
Growing high and middle income population
Growing at a pace of over 10%* per annumover last decade
Affordability growth
Falling interest rates
Easier consumer credit
Greater variety and quality at all pricepoints
Indianconsumer
The changing Indian consumer
From Euromonitor Retail Survey
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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 spendfreely.
Greater levels of education
Indianconsumer
The changing Indian consumer
*Data from NCAER
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Market size
Current market size is roughly US$ 286 bn*
96% of the 12 Million stores are less than 500Sq. ft.
Forecast Growth rate for the retailingindustry is roughly 8.3% for 2003-2008
Sales from large format stores would rise by24-49%**
Formal and modern format retailing would
enjoy rapid growth
Anticipatedgrowth
Anticipated growth
*From ICICI Retail Repo rt
**From Euromoni tor Retai l Survey
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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 to20-40% wastage
Non level playing field issues Wide differences in treatment of small and
large retailers
Industrydynamics
Industry dynamics
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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 itdifficult for retailers to acquire land
Government is largest property owner incountry
Urban Land Ceiling act is archaic
Stamp Duty and registration charges athigh levels. Also vary from state to state
RE issues
Real estate issues
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Growth determining factors
Government Policy
Infrastructure development
GDP growth Employment generation and job creation
In several new sunrise industries
Implies greater purchasing power
Growthfactors
Growth factors
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India ranked 5th in the Global A.T KearneyRetail Development Index
Second only to China in Asia
Least saturated of all global marketsstudied
The least competitive of all global marketsstudied
Implies lower barriers of entry for globalplayers
Considering tremendous market size,excellent potential for foreign players
India ranked 3rd in the Global A T Kearney FDIConfidence Index in 2004
Improved from Rank 6 in Year 2003
AdvantageIndia
The Indian advantage
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailingWhy FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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Current Indian FDI Regime FDI not permitted in retail trade sector,
except in:
Private labels
Hi-Tech items / items requiringspecialized after sales service
Medical and diagnostic items
Items sourced from the Indian smallsector (manufactured with technologyprovided by the foreign collaborator)
For 2 year test marketing (simultaneous
commencement of investment inmanufacturing facility required)
FDI in Retailnot permitted
FDI in Indian retailing
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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
51:49 JV between RPG and Dairy Farm
International, Leading food retailer in India now
Mc Donalds
Current FDI
FDI in Indian retailing
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Franchise International company gives name and
technology to local partner. Gets royalty inreturn
In case master franchise is appointed forregion or country, he has right to appoint
local franchiseesNike, Pizza Hut, Tommy Hilfiger, Marksand Spencer, Mango
Manufacturing
Company sets up Indian arm for production
Bata India. It also has right to retail inIndia
How they arepresent
International retailers in India: Strategies
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Distribution
International company sets up localdistribution 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 arepresent
International retailers in India: Strategies
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Agenda
Retailing : An overview
Indian retail
FDI in Indian retailing
Why FDI ?How FDI ?
Incentives for FDI
Case study : Chinese retail
Recommendations
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Improve competition
Develop the market
Greater level of exports due to increasedsourcing by major players
Sourcing by Wal-Mart from China improvedmultifold after FDI permitted in China
Similar increase in sourcing observed forMetro in India
Provides access to global markets forIndian producers
Benefits ofFDI
Why FDI?
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Investment in technology Cold storage chains solve the perennial problem
of wastage
Greater investment in the food processing sectortechnology
Better operations in production cycle and
distribution Better lifestyle
Greater level of wages paid by internationalplayers usually
More product variety
Newer product categories
Economies of scale to help lower consumer price
Increased purchasing capacity of consumers
Benefits ofFDI
Why FDI?
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Manpower and skill development Through retail training and
Greater managerial talent inflow from othercountries
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 sizeindustries
Benefits ofFDI
Why FDI?
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Benefits to the government
Greater Per
Capita Income
Greater Consumer
Spending due to
economic boom
Increasing
Tax Paying
Population
Greater
Sourcing
From India
Reduced Tax
Evasion
GDP Growth
Increased Tax
Revenues
Greater
Exports
Employ
mentBenefits
to Govt.
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Increase employment levels
FDI would result in market growth andexpansion
Employment generated at various levels Increased consumer demand impliesemployment generation across the value chain
Does not need very high skill sets Needs high school graduates and othersimilar skill levels
Currently this is a majorly unemployeddemographic group
Boom in employment Similar to job generation in ITES industry
On a much larger scale
But new jobs comparatively lower down thevalue chain
Benefits togovt.
Benefits to the government
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailingWhy FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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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 sufficientinducers
No need for costly tax breaks, import dutyexemptions, land and power subsidies, andother enticements
How FDI ?
How FDI ?
2 yrs
2 yrs
2 yrs
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailingWhy and why not FDI ?
How FDI ?
Case study : Chinese retailing
Recommendations
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FDI permitted in 1992. 40 foreign retailers havesecured approval
Retail sales have [email protected]% CAGRsince 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$1.1 bn (Around 30% of our total FDI in 2003)
Current restrictions on FDI will be phased outover 5 years as condition of WTO entry
Chineseretailing
Case study : Chinese retailing
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7
8
8
0
8
5
9
0
9
1
9
2
9
3
9
4
9
5
9
6
9
7
9
8
9
9
0
0
0
1
0
2
75
150
225
300
375
FDI in retail allowedUS$
bn
Total wholesale and retail trade
Retail sales grew @ 19.6% CAGR for the next 4 years after theintroduction of FDI in 1992
Years
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China: The effect of FDI
Modern formats have grown after FDI
But so have traditional players
Type No. of stores in
1996
No. of stores in
2001Traditional 1,920,604 2,565,028
Supermarkets 13,079 152,194
Convenience 18,091
Hypermarkets 593
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Employment in retailing is increasing
Source : China Statist ical Yearbook 2001
Employment in Retailing
0
10
20
30
40
50
60
90 91 92 93 94 95 96 97 98 99 00 01
Year
Employmentin
Reta
iland
wholes
ale(Mn)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
%
ofTo
talLabor
fo
rce
Employment %
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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*
Chineseretailing
Case study : Chinese retailing
Source : company w ebsi tes
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Strong evidence in favor of FDI
FDI improves the entire size of the industry
Retailing in China has grown at acompound rate of 15% per annum afterFDI inflow
Employment growth
Evolution of modern formats
Local players can survive and even beatforeign competition
Need for a strong retailing industry inIndia
Scale is the key to success for localretailers
Lessons fromChina
Lessons from China
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Agenda
Retailing : An overview
Indian retail
The change factor
FDI in Indian retailingWhy FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
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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 retailchains
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
Recommendations
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THANK YOU