foreign direct investment in retail
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Foreign Direct Investment in Retail
February 23, 2004
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AgendaRetailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
3
AgendaRetailing : An overview
Indian retail
The change factor
FDI in Indian retailing
Why FDI ?
How FDI ?
Case study : Chinese retail
Recommendations
4
Retailing World’s 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
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 India’s 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 world’s top companies**Euromonitor 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
7
Weekly MarketsVillage FairsMelas
Convenience StoresMom and Pop/Kiranas
PDS OutletsKhadi StoresCooperatives
Exclusive Brand OutletsHyper/Super MarketsDepartment StoresShopping Malls
Traditional/Pervasive Reach
Government Supported
Historic/Rural Reach
Modern Formats/ International
Evolution of Indian retail
Source of Entertainmen
t
Neighborhood Stores/Convenie
nce
Availability/ Low Costs / Distribution
Shopping Experience/Efficie
ncy
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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
Evolution of Indian retail
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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
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
Indian retailers
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
13
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
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 age100 mn 17-21 year olds*. Tend to spend freely.
Greater levels of education
Indian consumer
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 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
Anticipated growth
*From ICICI Retail Report
**From Euromonitor Retail 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 to 20-40% wastage
Non level playing field issues Wide differences in treatment of
small and large retailers
Industry dynamics
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 it difficult for retailers to acquire land
Government is largest property owner in countryUrban Land Ceiling act is archaic
Stamp Duty and registration charges at high 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
creationIn several new sunrise industriesImplies greater purchasing power
Growth factors
Growth factors
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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
The Indian advantage
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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
21
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
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 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
International retailers in India: Strategies
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Distribution International company sets up local
distribution office Supply products to Indian retailers
to sell Also set up franchised outlets for
brandSwarovski, Hugo Boss
Wholesale trading Cash and Carry operations 100% FDI permitted
Metro Cash n Carry
How they are present
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
26
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
Why FDI?
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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
Why FDI?
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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
Why FDI?
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Benefits to the government
Greater Per Capita Income
Greater ConsumerSpending due to
economic boom
Increasing Tax Paying Population
Greater Sourcing
From India
Reduced TaxEvasion
GDP Growth
Increased Tax Revenues
Greater Exports
Employment
Benefits to Govt.
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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.
Benefits to the government
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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
32
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
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 retailing
Why and why not FDI ?
How FDI ?
Case study : Chinese retailing
Recommendations
34
FDI permitted in 1992. 40 foreign retailers have secured approval
Retail sales have [email protected]% 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
Case study : Chinese retailing
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9
1
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75
150
225
300
375
FDI in retail allowed
US
$ b
nTotal wholesale and retail trade
Retail sales grew @ 19.6% CAGR for the next 4 years after the introduction 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 2001
Traditional 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 Statistical 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
Em
plo
ym
ent
in
Reta
il a
nd
whole
sale
(M
n)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
% o
f Tota
l Labor
forc
e
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*
Chinese retailing
Case study : Chinese retailing
Source : company websites
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Strong evidence in favor of FDI FDI improves the entire size of the
industryRetailing 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 competitionNeed for a strong retailing industry in India
Scale is the key to success for local retailers
Lessons from China
Lessons from China
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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
41
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
Recommendations
42
THANK YOU