Fdi in retail

FDI in Multi Brand Retail Trade – The Journey

2006

2010

20112012

1997100% FDI beingpermitted in cash &carry wholesale tradingunder the governmentapproval route

FDI permitted in cash & carry,wholesale trading comes underthe automatic route

FDI in single brand retail waspermitted to the extent of 51%

DIPP had put up a discussionpaper proposing FDI in multi-brandretail

The Story So Far….

Union Cabinet approved 51% FDI in multi-brand retail Increasing the FDI limit in single

brand retail to 100% However the implementation was

deferred, for evolving a broaderconsensus on the subject

January DIPP notified thedecision to allow 100%FDI in Single brandretailSeptember Union Cabinet approvesthe FDI limit in Multibrand retail of 51%

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*DIPP: Department of Industrial Policy and Promotion

The Policy - Single Brand Retail Trading

NOW

FDI in single brand retail trading is permittedup to 100% with Government approval

Products to be sold should be of a „SingleBrand‟ only

30% sourcing is to be done from micro andsmall industries (investment in Plant andMachinery not exceeding US $ 1mm)

This condition will ensure that SME sector,including artisans, craftsman, handicraft andcottage industry gets the benefits ofliberalization

EARLIER

For Single Brand Retail Trading (SBRT)sector – only 51% FDI permitted – subjectto approvals and conditions such as:

Products should be of a „SingleBrand‟ only

Products to be under the same brandin one or more countries if are soldoutside India

„Single Brand‟ products should bebranded during manufacturing

The foreign investor should be the

owner of the brand

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EARLIER FDI in Multi Brand Retail Trading was not

allowed

products shall be sourced from 'small

industries‟ (investment in Plant and Machinerynot exceeding US $1million)

Sourcing requirements will be checked

together for first five years – after that on aannual basis

Retail trading by means of e-commerce – notpermissible

At least 50% of total FDI brought in shall beinvested in „back-end infrastructure‟** withinthree years of the induction of FDI

NOW FDI in Multi Brand Retail Trade is permitted up

to 51%, subject to following conditions:

Outlets to be set up - only in cities with apopulation of more than 1m (within a 10kmrange)*

Minimum investment by the foreign investor -US $100mm and at least 30% of theprocurement of manufactured / processed

The Policy - Multi Brand Retail Trading

* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana,J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and

Dadra Nagar Haveli

** Back-end Infrastructure includes supply chain, logistics and warehousing butnot land and rentals

S

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SWOT Analysis of FDI in Retail

TRENGTHS W EAKNESSES

T

• Retail is a $450bn Industry inIndia

• Young and dynamic manpower• Highest shop density in the world• High growth rate in retail &

wholesale trade• Presence of big industrial houses

with deep pockets

PPORTUNITIES

• High capital investment requiredin the retail sector (real estate)

• Lack of trained and educatedwork force

• Higher prices as compared tolocal shops

• Will mainly cater to high-endconsumers placed in metros

HREATS

• High employment generation inthe future

• Will enhance financial condition offarmers

• Encourage foreign capital inflows• Result in increasing supply-chain

efficiency• Improve Logistics & Infrastructure

• Effect on the small retailers - localKirana stores (mom-pop stores)

• Long gestation period - ForeignRetailers will take a while to adaptto India and generate profits

• States not buying in soefficiencies expected may not beachieved

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Subsequent populist decisions are feared, suchthat the foreign retailers may not be able toachieve dominant market positions or buy / rent atthe right locations

Rough ride so far…..

It is not easy to be successful in a place where culture, tradition and food habits changeevery 124 miles

Some of the largest and most prominent Indian business houses such as Reliance, Godrej,RPG and the Future Group have all struggled in the Retail Industry in India1. These largeplayers have lost a significant amount of money and in fact one of the leaders in the space,Subhiksha, which at one time had almost 1,600 outlets has shut down

India‟s image is one of a “fickle policy maker” with regulations being frequently changed,rolled back and even retrospectively amended have made investors speculative

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Hidden Opportunity despite the rough ride

A comparison of the Retail Industry in Emerging Markets shows that India actually has thelowest organized retail sector amongst its peers and therefore is the biggest opportunity

India‟s closest peer in terms of size of population, China, has an organized retail market thatis almost 3x the size of the market in India. A country like Brazil which is less than a 1/6thof India in terms of population has a organized retail market of almost 6x of that of Indiaand mostly homogeneous tastes across the country making it easy to standardize offerings

Indonesia which is the largest economy in Southeast Asia and often cited as replacingIndia as the “I” in BRIC economies has displayed strong growth in 2011 and in the first halfof 2012 with significant growth in the Retail sector. It has only 1/5th of India’s populationand yet has a organized retail sector which is 5x of that of India

There are two ways to look at the above data. One is to see that there are plenty of

emerging markets where more capital could be deployed in retail, but the other is to seethe hidden opportunity in investing in the retail sector in India (the 2nd largest country inthe world in terms of population) where there is a white canvas and wide spaces and thestory of organized retail can be painted in whichever way the potential foreign entrants desire

India

• FDI allowed51% in Multi-brand &100% inSingle Brand

• Population1,210m

• Share oforganizedretail 5-6%

• Top Retailer:Future Group

Brazil

• FDI allowed100%

• Population205.7m

• Share oforganizedretail 36%

• Top Retailer:Pao deAcucar

Russia

• FDI allowed100%



• Top Retailer:X5 RetailGroup

China• FDI allowed

100%, upfrom 49% in1992

• Population1,343m


• Top Retailer:Bailian GroupCo Ltd

Indonesia

• FDI allowed100% in 1998



• Top Retailer:MatahariPutra Prima

Global Experience of FDI in Retail

Emerging Markets which allowed FDI in Retail with the share oforganized retail in the overall retail industry:

8Source : Goldman Sachs, Technopak

condition. Further state government and FIPB

permissions will be required

Get it approved - All the regulatory approvals of FDI andother applicable laws will have to be obtained, which willbe easier to do, given the presence of Indian partner

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Steps to Establish Presence in India

Find a Joint Venture Partner –

The maximum equity stake which a Foreign investor canhold cannot be more than 51%, therefore it will have tofind an Indian partner to enter into a Joint Venture with

Look for space – It will have to look for a city with aminimum population of 1 million as per the 2011 census.India comprises of about 51 cities which meet the

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Proposed Business Model

Indian Partner- To provide 49% stake in

form of capital /infrastructure or leveragetheir network to establishpresence-They will also be able to

navigate the political andlegal hurdles as well asuse their local knowledgeand brand

Foreign Partner- To provide capital of at

least US $100mm

- They will bringtechnology, efficiency insupply chainmanagement and globalexperiences fromprevious ventures

Outcome:

- There is a possibility of a mutually symbiotic relationship between theForeign and Indian Partner to jointly harness their capabilities andcreate a world-class Retailer in India, which will have the uniqueadvantage of a being the first mover and establishing the benchmark ofexcellence for the Industry

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The ride despite the speed breakers …

There is clearly an opportunity for the Domestic Giants, Kirana Stores and the ForeignRetailers to co-exist in India

The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have

a homogenous selection of products across their stores, typically need 150,000 sq feet ofspace and require a car to get to. India is years away from when majority of its populationwill have the ability to only shop at the Wal-Marts of the world. Competition will force theKirana Stores to lift their game, become more price competitive, have a better selectionof goods at lower prices and maintain proper records of customers (people will still shopthere for proximity, comfort of relationship and easy credit)

Foreigners will bring to India their expertise and efficiency in retailing, they will investcapital in improving logistics and infrastructure in India (for example: Cold StorageLogistics is still almost non-existent in India) and share technology and know-how with theirlocal Indian Partners, but will also be able to become profitable over a period of time as theirbrands and presence increase across the country

Hopefully, the Domestic Giants will learn the best practices from their foreign counterpartsand just as in Brazil foreign retailers thrive but still a local player is the most dominant(Pao de Acucar) India will see a much more inclusive and efficient Retail Industry

On the whole, if India has to grow it needs capital, training

and innovation. Yes the short-term effects of the announcedreforms will be painful, but in the long-term if they will helpmake Retail a more organized industry in India, providebetter quality goods at cheaper prices at convenientlocations, improve infrastructure and the supply chainmechanism throughout the country, provide employmentand retail sector specific training to a large population it willbe a huge boon to the nation

Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. Butthose who are willing to be patient and make a more long-term bet on India, definitely have the

opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing market

in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail).The foreign players who are willing to learn from their mistakes in other emerging markets andearly experiences in India, go through a careful partner selection process, understand thepolitical / legal / external hurdles and invest with a realistic time horizon truly have anunique opportunity to create win-win situations for all stakeholders. Several other sectors haveseen foreign entrants with a successful and profitable model in India (Dominos, Citigroup,Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the times to come! 12

The ride despite the speed breakers …

Executive Summary

For more than a year, every problem in India has been blamed on the incumbentgovernment by national and international lobbies and “Policy Paralysis” has been thereason cited for every shortfall including the falling rupee, the worsening fiscal deficit, highinflation, high interest rates and delayed capital expenditure plans

On September 14, 2012 the government broke the shackles and came out with the muchneeded and highly anticipated reforms regarding Foreign Direct Investment (FDI) in theMulti-brand Retail Sector (MBRT) of India with a surety of no roll – back this time

Dinodia Capital Advisors‟ view is that these reforms will create price competition andremove the multiple layers of inefficiency between the farmers and the final retailer andhopefully help the farmers and producers of goods realize a bigger share of the pie inthe long-run

Given the current negative sentiment of foreign investors (post Vodafone and Draft GAARGuidelines) and the lack of capital inflows in India, these reforms will encourage foreignfirms to give India a serious look and encourage them to invest capital in the country

As foreign firms who partner with local Indian firms are able to generate profits and achievesuccess in India it will encourage FDI in other sectors as well and create a positive

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Fdi in retail