interim report kundal

8/3/2019 Interim Report Kundal

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FDI In Indian RetailScenarioInterim Report

SUBMITTED TO: Prof M S Bhat2/8/2012

SUBMITTED BY:

Kundal Mahanta

PGDM NO: 10085


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ContentsList of Abbreviations Used ....................................................................................................................... 3

Executive Summary ................................................................................................................................. 4

Introduction ............................................................................................................................................ 5

Definition of Retail ................................................................................................................................... 7

Division of Retail Industry Organized and Unorganized Retailing ........................................ ............... 7

FDI Policy in India .................................................................................................................................... 8

FDI Policy with Regard to Retailing in India........................................................................................... 8

Entry Options For Foreign Players prior to FDI Policy ............................. ....................... ........................ 9

FDI in Single Brand Retail ....................................................................................................................... 10

But, what is a brand? ................................................................................................................... 10

FDI in Multi Brand Retail ........................................................................................................................ 12

Foreign Investors Concern Regarding FDI Policy in India ................................ ....................... ................. 12

Concerns for the Government for only Partially Allowing FDI in Retail Sector ......................... ............ 13

Why Global Retailers are Interested in India? .................................. ...................... ................................ 14

Strategic Location & Geography ......................................................................................................... 14

Versatile Demographics: .................................................................................................................... 14

Vast growing Economy: ............................ .......................... .......................... ............................. ......... 14

Retailing: The Emerging Revolution: ........................ ................................ ...................... ..................... 15

Indian Retailing: Opportunities Unexplored: ...................................................................................... 15

What makes India attractive to foreigners A comparative analysis .................................... .................. 17

Limitations of the Present Setup ............................................................................................................ 21

Infrastructure .................................................................................................................................... 21

Intermediaries dominate the value chain .......................... ................................ ...................... ........... 21

Improper Public Distribution System (PDS) ..................................................................................... 22

No Global Reach ................................................................................................................................ 22

Arguments in favor of FDI in Retailing .................................................................................................... 22

Arguments against FDI in Retailing ......................... ................................ ....................... ......................... 23

FDI in Retailing in India - Policy and Entry Routes .................................................. ............................ ..... 24

Bibliography .......................................................................................................................................... 29

Reports .............................................................................................................................................. 29

Websites ............................................................................................................................................ 29


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Figures

Figure 1: Global Retail Index vs. Retail Labor Index................................................................................. 19

Figure 2: Window of Opportunity Analysis ............................................................................................. 20


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List of Abbreviations Used

1. FDI - Foreign Direct Investment2. GDP Gross Domestic Product3. FEMA - Foreign Exchange Management Act4. RBI - Reserve Bank of India5. SIA - Secretariat for Industrial Assistance6. DIPP - Department of Industrial Policy and Promotion7. FIPB - Foreign Investment Promotion Board8. GRDI - Global Retail Development Index9. PDS - Public Distribution System10.MSME - Micro Small & Medium Enterprises11.EDB - Export Development Board of Sri Lanka


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Executive Summary

In recent years, the destination sectors in Foreign Direct Investments (FDIs) have become more

varied. FDI inflows have shifted from infrastructure, natural resources and export driven

manufacturing to other areas such as retailing, tourism, construction and off shore services. A

World Bank study showed that cumulative FDI inflows to the retail sector in the 20 largest

developing countries amounted to US$ 45 billion in 1998-2002 (about 7 per cent of the total of

these countries). The study showed that after liberalization; countries such as Brazil, Poland and

Thailand have received significant FDI in retailing.

In spite of the recent developments in retailing and its immense contribution to the economy,

retailing continues to be are the least evolved industries and the growth of organized retailing in

India has been much slower as compared to rest of the world. Over a period of 10 years, the

show of organized retailing in total retailing has grown from 10 per cent to 40 percent in Brazil

and 20 percent in China, while in India it is only 2 per cent (between 1995-2005). One important

reason for this is that retailing is one of the few sectors where foreign direct investment is not

allowed. Within the country, there have been protests by trading associations and other

stakeholders against allowing FDI in retailing. On the other hand, the growing market has

attracted foreign investors and India has been portrayed as an important investment destinationfor the global retail chains. The present paper attempts to analyze the reason why foreign

retailers are interested in India, the strategies they are adopting to enter India and there prospects

in India.


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Introduction

Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive

daughter asked to her father, Why do we not have a Harrods in Delhi? Shopping there is so

much fun! Simple question for a four-year-old, but not so simple for her father to explain.

As per the current regulatory regime, retail trading (except under single-brand product retailing

FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a

company to be able to get foreign funding, products sold by it to the general public should only

be of a single-brand; this condition being in addition to a few other conditions to be adhered to.

That explains why we do not have a Harrods in Delhi.

India being a signatory to World Trade Organizations General Agreement on Trade in Services,

which include wholesale and retailing services, had to open up the retail trade sector to foreign

investment. There were initial reservations towards opening up of retail sector arising from fear

of job losses, procurement from international market, competition and loss of entrepreneurial

opportunities. However, the government in a series of moves has opened up the retail sector

slowly to Foreign Direct Investment (FDI). In 1997, FDI in cash and carry (wholesale) with

100 percent ownership was allowed under the Government approval route. It was brought under

the automatic route in 2006. 51 percent investment in a single brand retail outlet was alsopermitted in 2006. FDI in Multi-Brand retailing is prohibited in India.

After the waves of globalization, liberalization and privatization marketing scenario particularly

retailing has changed radically. These changes have resulted in emergence of new environment

for buyers behavior and purchasing habits. The upper and upper middle strata of the society now

prefers to purchase well established branded goods from standard showrooms and it has

transformed the entire picture and perception not only in the metro cities but almost in all big

cities of our country. It is worth mentioning that retailing in India has been hailed as one of thesun-rise sectors in the economy. According to A. T. Kearney, a well-known International

Management Consultant, India is the second most attractive retail designation globally, among

thirty emergent markets. Till now unorganized retailing sector was dominating retail trade in

India by constituting 98% of all retailing trade but now not only traditional Indian retailers but

giant Indian retailers like Reliance has entered in the area and is planning to expand its activities


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in this sector in a big way. Even world renowned retailing organization like Wal-Mart has

decided to enter in India via joint venture with Bharti and French retailer Carrefour is busy in

chalking out strategy to enter the hyper market and supermarket retail format in India through

Dubai based retail major Landmark group. In this context an effort has been made in this paper

to review the emergence of global retailers in India, to examine the govt. policy relating to FDI

in retailing and to evaluate the prospects of global retailing in India.


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Definition of Retail

In 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.

Thus, retailing can be said to be 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. A retailer is

involved in the act of selling goods to the individual consumer at a margin of profit.

Division of RetailIndustry Organized and Unorganized Retailing

The retail industry is mainly divided into: - 1) Organized and 2) Unorganized Retailing

y Organized retailing refers to trading activities undertaken by licensed retailers, that is,those who are registered for sales tax, income tax, etc. These include the corporate-

backed hypermarkets and retail chains, and also the privately owned large retail

businesses.y Unorganized retailing, on the other hand, refers to the traditional formats of low-cost

retailing, for example, the local kirana shops, owner manned general stores, paan/beedi

shops, convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the

unorganized retailers. The organized retail however is at a very nascent stage. The sector is the

largest source of employment after agriculture, and has deep penetration into rural India

generating more than 10 per cent of Indias GDP.


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FDI Policy in India

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign

country through the acquisition of a local company or the establishment there of an operation on

a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is

invested in or to enhance the production capacity of the economy.

Foreign Investment in India is governed by the FDI policy announced by the Government of

India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve

Bank of India (RBI) in this regard had issued a notification, which contains the Foreign

Exchange Management (Transfer or issue of security by a person resident outside India)

Regulations, 2000. This notification has been amended from time to time.

The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring

and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity

cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance

(SIA), Department of Industrial Policy and Promotion (DIPP). The foreign investors are free to

invest in India, except few sectors/activities, where prior approval from the RBI or Foreign

Investment Promotion Board (FIPB) would be required.

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy

issued in October 2010 which provide the sector specific guidelines for FDI with regard to the

conduct of trading activities.

a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the

automatic route.

b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand

products, subject to Press Note 3 (2006 Series)

c) FDI is not permitted in Multi Brand Retailing in India.


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Entry Options For Foreign Players prior to FDI Policy

Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had

been operating in the country. Some of entrance routes used by them have been discussed in

sum as below:-

1. Franchise Agreements

It is an easiest track to come in the Indian market. In franchising and commission agents

services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of

India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for

entrance of quick food bondage opposite a world. Apart from quick food bondage identical to

Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have

entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading

100% FDI is allowed in wholesale trading which involves building of a large distribution

infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and

not Consumers. Metro AG of Germany was the first significant global player to enter India

through this route.

3. Strategic Licensing Agreements

Some foreign brands give exclusive licenses and distribution rights to Indian companies.

Through these rights, Indian companies can either sell it through their own stores, or enter into

shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel

brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR

entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

4. Manufacturing and Wholly Owned Subsidiaries.

The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in

manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These

companies have been authorized to sell products to Indian consumers by franchising, internal

distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an

exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary,

Nike India Private Limited.


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FDIin Single Brand Retail

The Government has not categorically defined the meaning of Single Brand anywhere neither

in any of its circulars nor any notifications.

In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion

Board (FIPB) approval and subject to the conditions mentioned in Press Note 3 that (a) only

single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the

same manufacturer would not be allowed), (b) products should be sold under the same brand

internationally, (c) single-brand product retail would only cover products which are branded

during manufacturing and (d) any addition to product categories to be sold under single-brand

would require fresh approval from the government.

While the phrase single brand has not been defined, it implies that foreign companies would be

allowed to sell goods sold internationally under a single brand, viz., Reebok, Nokia, and

Adidas. Retailing of goods of multiple brands, even if such products were produced by the same

manufacturer, would not be allowed.

Going a step further, we examine the concept of single brand and the associated conditions:

FDI in Single brand retail implies that a retail store with foreign investment can only sell one

brand. For example, if Adidas were to obtain permission to retail its flagship brand in India,

those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for

which separate permission is required. If granted permission, Adidas could sell products under

the Reebok brand in separate outlets.

But, whatis a brand?

Brands could be classified as products and multiple products, or could be manufacturer brands

and own-label brands. Assume that a company owns two leading international brands in the

footwear industry say A and R. If the corporate were to obtain permission to retail its brand

in India with a local partner, it would need to specify which of the brands it would sell. A


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reading of the government release indicates that A and R would need separate approvals,

separate legal entities, and may be even separate stores in which to operate in India. However, it

should be noted that the retailers would be able to sell multiple products under the same brand,

e.g., a product range under brand A Further, it appears that the same joint venture partners

could operate various brands, but under separate legal entities.

Now, taking an example of a large departmental grocery chain, prima facie it appears that it

would not be able to enter India. These chains would, typically, source products and, thereafter,

brand it under their private labels. Since the regulations require the products to be branded at the

manufacturing stage, this model may not work. The regulations appear to discourage own-label

products and appear to be tilted heavily towards the foreign manufacturer brands.

There is ambiguity in the interpretation of the term single brand. The existing policy does not

clearly codify whether retailing of goods with sub-brands bunched under a major parent brand

can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI.

Additionally, the question on whether co-branded goods (specifically branded as such at the time

of manufacturing) would qualify as single brand retail trading remains unanswered.


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FDIin Multi Brand Retail

The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies

that a retail store with a foreign investment can sell multiple brands under one roof.

In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce

circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesnt suggest

any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global

retail giants to enter and establish their footprints on the retail landscape of India. Opening up

FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and

Tesco can open stores offering a range of household items and grocery directly to consumers in

the same way as the ubiquitous kirana store.

Foreign Investors Concern Regarding FDI Policy in India

For those brands which adopt the franchising route as a matter of policy, the current FDI Policy

will not make any difference. They would have preferred that the Government liberalize rules for

maximizing their royalty and franchise fees. They must still rely on innovative structuring of

franchise arrangements to maximize their returns. Consumer durable majors such as LG and

Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred

route right away.

For those companies which choose to adopt the route of 51% partnership, they must tie up with

a local partner. The key is finding a partner which is reliable and who can also teach a trick or

two about the domestic market and the Indian consumer. Currently, the organized retail sector is

dominated by the likes of large business groups which decided to diversify into retail to cash in

on the boom in the sector corporates such as Tata through its brand Westside, RPG Groupthrough Foodworld, Spencers Retail, Pantaloons of the Future Group and Shoppers Stop. Do

foreign investors look to tie up with an existing retailer or look to others not necessarily in the

business but looking to diversify, as many business groups are doing?


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An arrangement in the short to medium term may work wonders but what happens if the

Government decides to further liberalize the regulations as it is currently contemplating? Will the

foreign investor terminate the agreement with Indian partner and trade in market without him?

Either way, the foreign investor must negotiate its joint venture agreements carefully, with an

option for a buy-out of the Indian partners share if and when regulations so permit. They must

also be aware of the regulation which states that once a foreign company enters into a technical

or financial collaboration with an Indian partner, it cannot enter into another joint venture with

another Indian company or set up its own subsidiary in the same field without the first

partners consent if the joint venture agreement does not provide for a conflict of interest

clause. In effect, it means that foreign brand owners must be extremely careful whom they

choose as partners and the brand they introduce in India. The first brand could also be their last if

they do not negotiate the strategic arrangement diligently.

Concerns for the Government for only Partially Allowing FDIin Retail Sector

A number of concerns were expressed with regard to partial opening of the retail sector for FDI.

The Honble Department Related Parliamentary Standing Committee on Commerce, in its 90th

Report, on Foreign and Domestic Investment in Retail Sector, laid in the Lok Sabha and the

Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number

of issues related to FDI in the retail sector. These included:

It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers,

especially the small family managed outlets, leading to large scale displacement of persons

employed in the retail sector. Further, as the manufacturing sector has not been growing fast

enough, the persons displaced from the retail sector would not be absorbed there.

Another concern is that the Indian retail sector, particularly organized retail, is still under-

developed and in a nascent stage and that, therefore, it is important that the domestic retail sector

is allowed to grow and consolidate first, before opening this sector to foreign investors.


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Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of

large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the

unorganized retail sector employs an enormous percentage of Indian population after the

agriculture sector; secondly that the global retailers would conspire and exercise monopolistic

power to raise prices and monopolistic (big buying) power to reduce the prices received by the

suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social

tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit

margins of such retail chains would go up.

Why G

lob

alRet

ailers

areInterested

inInd

ia?

More specifically the global players are interested in India due to following reasons:

Strategic Location & Geography: India enjoys unique geographical advantage. It is

strategically located in Asia with access to all leading markets of the World. With total area of

32, 87,590 Sq. Km, Coastline of 7000 Km and borders with six countries India becomes most

promising destination for the foreign direct investment.

Versatile Demographics: Demographically with a population of more than 1.1 billion and

diverse culture, India is a land of all seasons. India presents a real cosmopolitan population with

diverse religions and culture. Hinduism, Buddhism, Jainism, Sikhism, Christianity and Islam are

the main religions of India. This variety of religions provides India with a diverse culture.

Besides, India has versatile population of urban and rural nature. This versatility of population

makes India a ready-made market for foreign retailers.

Vast growing Economy:On economic front, India the largest democracy of the world, have

a stable Govt. with robust programme of economic reforms. India with a foreign exchange

reserve of more than US $120 billion, FDI of more than US $9.9 billion ,average GDP growth of

more than 7% per annum, rupee appreciation Vs. U.S dollar of more than 2% in last two years

and with a rapidly growing investment in infrastructure has all the ingredients of a emerging

economic super power. India is tipped to be third largest economy in terms of GDP by the year

2050 (Table 1).


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Table 1: Forecast of GDP($ Trillion)Country 2010 2050

China 3 44.5

USA 13.3 35.2

India 0.9 27.8Japan 4.6 6.7

Brazil 0.7 6.1

Russia 0.8 5.9

UK 1.9 3.8

Germany 2.2 3.6

Italy 1.3 2.1

In such a scenario every multinational aims to set up a base in India, not to participate in Indian

growth story, rather to build their own future.

Retailing: The Emerging Revolution: Retailing is the largest private industry in India and

second largest employer after agriculture. The sector contributes to around 10 percent of GDP.

With over 12 million retail outlets, India has the highest retail outlets density in the world. This

sector witnessed significant development in the past 10 years from small unorganized family

owned retail formats to organized retailing. Liberalization of the economy, rise in per capita

income and growing consumerism has encouraged large business and venture capitalist in

investing in retail infrastructure. The importance of retail sector in India can be judged from

following facts (a) Retail sector is the largest contributor to the Indian GDP (b) The retail Sector

provides 15% employment (c) India has world largest retail network with 12 million outlets (d)

Total market size of retailing in India Is U.S $ 180 billion (e) Current Share of Organized

Retailing is just 2% which comes around to $3.6 trillion (f) Organized retail sector is growing @

28% per annum.

Indian Retailing: Opportunities Unexplored: India is sometimes referred to as the

nation of shopkeepers. This is because the country has the highest density of retail outlets - over12 million. However, unlike most developed and developing countries, Indian retail sector is

highly fragmented and bulk of the business is in the unorganized sector. As compared to China

(Table 2) the presence of global players in India is very less.


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Table 2: Number of Foreign Retailers in India & China

Retailer China India

Wal-Mart 40 ------

Carrefour 53 ------

Tesco 30 ------

Metro 21 02

KFC Over 1000 04

Starbucks 70 ------

McDonalds 580 47

Pizza Hut 110 75

Louis Vuitton 6 02

Prada 10 ------

B&Q 20 ------

Hugo Boss 60 02

India in such a scenario presents following facts to foreign retailers:

y There is a huge, huge industry with no large players. Some Indian large players haveentered just recently like Reliance, Trent.

y India can support significant players averaging $1 bn. in Grocery and $0.3- 0.5 bn. inapparel within next ten years.

y The transition will open multiple opportunities for companies and investors.

In addition to the above, improved living standards and continuing economic growth, friendly

business environment, growing spending power and increasing number of conscious customers

aspiring to own quality and branded products in India are also attracting to global retailers to

enter in Indian market.


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What makes Indiaattractive to foreigners A comparative analysis

Growth and development of a particular industry is always a major attraction to the foreigners.

GRDI represents countrywide yearly growth and development in retail sector. Index includes top

20 countries as per their growth. Based on the data of GRDI analysis top five countries are

analyzed to identify the market potential.

Table 3: Global Retail Development Index

2007

GRDI

Rank

Country Region Parameters weightage GRDI

Score

Country

risk

Market

attractiveness

Market

saturation

Time

pressure

25% 25% 30% 20%

1 India Asia 67 42 80 74 92

2 Russia Eastern

Europe

62 52 53 90 89

3 China Asia 75 46 84 84 86

4 Vietnam Asia 57 34 76 59 74

5 Ukraine Eastern

Europe

41 43 44 88 69

Legend 0 - high risk, low attractiveness, saturation, no time pressure100 Low risk, high attractiveness, not saturated, urgency to enter

The above table shows that India is ranked first with the score of 92 among twenty countries in

terms of retail growth followed by Russia and china in 2007 which was ranked 2th in 2004 after

Russia . So we can say that in last three years India attained remarkable growth in retail trade.

Growth in the retail trade is not the only factor to be considered but labor plays important role

because it is labor intensive industry. The appropriateness of the country depends upon best

combination of Growth Development and Labor as main resource. Considering this further

analysis is done with the help of retail labor index and position of India is analyzed.


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Table 4: Retail Labor Index

LaborIndex

Rank (outof 15

countries)2007

Country Region Parameters weightage RetailLaborIndexScore

TalentAvailability

Talentdevelopment

Laboreconomies

40% 40% 20%

4 India Asia 77 81 86 85

10 China Asia 76 44 85 71

------ Vietnam Asia Not Ranked among Top 15 countries.

------ Russia EasternEurope

Not Ranked among Top 15 countries.

------ Ukraine Eastern

Europe

Not Ranked among Top 15 countries.

Legend 0- low talent availability, low talent development, high labor cost100 High talent availability, high talent development, low labor cost

The above table depicts that India is fourth in terms of labor growth among fifteen countries in

2007. Thus it can be concluded that India is enjoying better position than other competing

countries in retail sector.

Giving importance to both the factors which are internally dependent on each other comparative

analysis is done of the year 2006 and 2007:

Table 5: Comparative analysis of GRDI index and labor index 20072007 2006

Country Region GRDI

index rank

Labor index

rank

GRDI

index rank

Labor index

rank

India Asia 1 4 1 8

China Asia 3 10 5 10

Russia EasternEurope

2 ----(above 15) 2 13

Vietnam Asia 4 ----(above 15) 3 ----(above 15)

Ukraine Eastern

Europe

5 ----(above 15) 4 9


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Figure 1: Global Retail Index vs. Retail Labor Index

Now it can be concluded that in the 2006 India was first in growth index and eighth in labor

index. In growth Russia was second but its labor growth was not considerable as it securedthirteenth rank. China secured fifth rank in growth and tenth in labor. But comparing labor other

than china and Russia Ukraine enjoyed better position. So for the comparison Vietnam cannot be

considered as it has not secured rank in top fifteen in labor index. The analysis shows that in

GRDI ranking India leads in 2007 followed by Russia, China, Vietnam and Ukraine. Comparing

this with labor even though India is not first among top fifteen countries but first among the top

five GRDI Rated countries with the rank 4 followed by china. In 2007 between all four countries

India is at top in growth and improved upon its labor index. Russia is still second in growth but

labor growth is diminishing. Opportunities are available with labor challenges in Russia which

may not give appropriate returns to the new entrant. In china and Ukraine labor challenges at

moderate level but opportunities are comparatively lesser than India. So it can be concluded that

India is the most resourceful country considering labor as the main resource for retail operations

followed by China and this is the reason why foreigners are attracted towards Indian retail sector.


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Figure 2: Window of Opportunity Analysis

Growth of Indian retail sector was at very nascent stage in 1995 .China was ahead of India in the

development. After 1995 looking at the growth trend of India and china other countries also

came in the competition. In 2003 all the countries entered in peaking (growth) stage of the

industry in which again china was ahead followed by Hungary, India and Ukraine and Vietnam.

In 2006 china entered in declining (Maturity-saturation) stage followed by Ukraine. Russia is

very near to attain maturity stage so no longer attracting global countries. India has achieved

maximum growth by 2006 and still growing at the peaking stages per analysis of 2007 still India

is in peaking stage. That is why India has become major attraction to foreigners.

This clearly shows why foreigners have eye watch on India.

Other factors like Economic growth in terms of greater disposable incomes for the booming

Indian middle class, which currently comprises 22% of the total population. This figure is


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expected to increase to 32% by 2010. Disposable incomes are expected to rise at an average of

8.5% p.a. till 2015, change in Demographics which constitutes More than 50% of the population

is less than 25 years of age and strong growth is expected to continue in this age bracket which is

the major consuming class and the Indian urban population is projected to increase from 28% to

40% of the total population by 2020 and incomes are simultaneously expected to grow in these

segment are contributing factors towards Indias attraction.

Limitations of the Present Setup

Infrastructure

There has been a lack of investment in the logistics of the retail chain, leading to an inefficient

market mechanism. Though India is the second largest producer of fruits and vegetables (about

180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-

alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for

potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it

difficult to link to distant markets, including overseas markets, round the year. Storage

infrastructure is necessary for carrying over the agricultural produce from production periods to

the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy

losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI

is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of

FDI in retailing; FDI flow to the sector has not been significant.

Intermed

iaries dom

ina

te the val

ue chai

n

Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale

regulated markets, governed by State APMC Acts, have developed a monopolistic and non-

transparent character. According to some reports, Indian farmers realize only 1/3rd of the total


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price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of

organized retail.

Improper Public Distribution System (PDS)

There is a big question mark on the efficacy of the public procurement and PDS set-up and the

bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has

been a matter of great concern. The absence of a farm-to-fork retail supply system has led to

the ultimate customers paying a premium for shortages and a charge for wastages.

No Global Reach

The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of

branding and lack of avenues to reach out to the vast world markets. While India has continued

to provide emphasis on the development of MSME sector, the share of unorganized sector in

overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08. This has

largely been due to the inability of this sector to access latest technology and improve its

marketing interface.

Arguments in favor ofFDIin Retailing

FDI in retailing is favored on following grounds:

(1) The global retailers have advanced management know how in merchandising and inventory

management and have adopted new technologies which can significantly improve productivity

and efficiency in retailing.

(2) Entry of large low-cost retailers and adoption of integrated supply chain management by

them is likely to lower down the prices.

(3) FDI in retailing can easily assure the quality of product, better shopping experience and

customer services.


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(4) They promote the linkage of local suppliers, farmers and manufacturers, no doubt only those

who can meet the quality and safety standards, to global market and this will ensure a reliable

and profitable market to these local players.

(5) As multinational players are spreading their operation, regional players are also developing

their supply chain differentiating their strategies and improving their operations to counter the

size of international players. This all will encourage the investment and employment in supply

chain management.

(6) Joint ventures would ease capital constraints of existing organized retailers and

(7) FDI would lead to development of different retail formats and modernization of the sector.

Arguments againstFDIin Retailing

Many trading associations, political parties and industrial associations have argued against FDI

in retailing due to following reasons:

(1) Indian retailers have yet to consolidate their position. The existing retailing scenario is

characterized by the presence of a large number of fragmented family owned businesses, who

would not be able to survive the competition from global players.

(2) The examples of South East Asian countries show that after allowing FDI, the domestic

retailers were marginalized and this led to unemployment.

(3) FDI in retailing can upset the import balance, as large international retailers may prefer to

source majority of their products globally rather than investing in local products.

(4) Global retailers might resort to predatory pricing. Due to their financial clout, they often sell

below cost in the new markets. Once the domestic players are wiped out of the market foreign

players enjoy a monopoly position which allows them to increase prices and earn profits.

(5) Indian retailers have argued that since lending rates are much higher in India, Indian retailers,

especially small retailers, are at a disadvantageous position compared to foreign retailers who

have access to International funds at lower interest rates. High cost of borrowing forces the

domestic players to charge higher prices for the products.

(6) FDI in retail trade would not attract large inflows of foreign investment since very little

investment is required to conduct retail business. Goods are bought on credit and sales are made


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on cash basis. Hence, the working capital requirement is negligible. On the contrary; after

making initial investment on basic infrastructure, the multinational retailers may remit the higher

amount of profits earned in India to their own country.

FDIin Retailing in India - Policy and Entry Routes

In India, till recently, FDI was not allowed in retailing, but the Union cabinet on January 24,

2006 rationalized and simplified the FDI policy and allowed the contentious issue of foreign

investment in retail sector by allowing FDI up to 51 percent with prior government approval for

retail trade in single brand products. This would imply that foreign companies would be allowed

to sell goods sold internationally under a single brand, viz. Reebok, Nokia, and Adidas. Retailing

of goods of multiple brands, even if such products are produced by same manufacturer would not

be allowed. However, there are indications that the Government may allow foreign investments

in retail segments where small domestic players do not operate. The Department of Industrial

Policy and Promotion is preparing a detailed policy for further liberalization of FDI in the

country, which is likely to be announced before the budget 2007-08. As part of the proposed

move, the Ministry has marked out sports goods, electronics and building equipment as some of

the sectors that may be opened up with a 51% cap on FDI. The government is also considering

permitting multi-brand retail in such areas. The government is likely to discuss the matter with

the left parties before taking a final call on the issue. The Left has initially stalled the

governments plans to allow FDI in multi-brand retail on the grounds that it will adversely affect

mom-and-pop stores.

It is worth mentioning that FDI restrictions have not deterred prominent international players

from entering India. Many U.S and other international retailers and consumer goods companies

consider India a top-priority market with the potential for breakthrough growth. In this context

(a) Wal-Mart CEO, John Menzar visited India in 2005 and met with Prime Minister to discuss

relevant issues. Wal-Marts sourcing from India, which was U.S. $300 million in 2004 reached

to U.S. $1.2 billion in 2005.


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(b) Fashion brand DKNY is set to foray into Indian fashion industry through franchise agreement

with Indian company, S. Kumars.

(c) Tommy Hilfiger, International fashion icon says that We are going to build a wonderful

lifestyle business here

(d) Phillip Morris is ready to unveil its plans for kraft in India through Kraft Jacob Suchard

(KJS) India, a wholly owned arm of Philip Morris India

(e) Starbucks has expressed its interest in entering India through the franchise route.

Although before January 24, 2006 FDI was not allowed in retailing, many international players

are operating in the country. Some of entry routes employed by them are discussed in details as

below:

(a) Manufacturing and Local Sourcing: Companies that set up manufacturing facilities are

allowed to sell the products in the domestic market. Consumer durable companies such as Sony

and Samsung have entered the retail sector through this route. Due to high labor cost in their

domestic market, many international brands are setting up manufacturing bases in developing

countries such as India and China and / or are sourcing products from local manufacturers. For

example, Levi's and Tommy Hilfiger are sourcing products from Indian manufacturers like

Arvind Mills. Benetton has a manufacturing unit in India. Other international brands like GIVO

from Italy have set up export-oriented manufacturing facilities. These companies are allowed to

sell products to Indian consumers through franchising, local distributors, existing Indian retailers,

own outlets, etc.

(b) Franchising: Franchising is the most preferred mode through which foreign players have

entered the Indian market. It is the easiest route to enter the Indian market. Franchising is often

used as a mode to expand the market of a particular retail enterprise outside domestic economy

since it allows firms to expand without investing their own capital, is based on local expertise

and enables firms to curb local oppositions and regulations. This is the most common mode for

entry of fast food chains across the world. Apart from fast food chains like Pizza Hut, players

such as Lacoste, Mango, Nike and Marks and Spencer, have entered the Indian market through

this route. For setting up franchising operation, the foreign players are required to take

permission from the Reserve Bank of India (RBI). RBI often imposes the condition that

franchisers have to bring in foreign investment and set up a base for carrying on operational

activities. A foreign franchiser not wishing to make a direct investment would have to render


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technical assistance to the franchisee. Some franchisee, such as Pizza Hut has made significant

investment in the supply chain. The arrangements between franchisee and franchiser are found to

be extremely flexible and are based on negotiation between the two. Some Indian franchisees

have complained about high franchising fees together with high real estate costs, high import

duties and other costs escalate the prices. For instance, the cost of a Marks and Spencer product

is higher than not only the brands produced domestically but also in comparison to the price of

the product in the UK. The high prices restrict the ability of the foreign players to penetrate the

market but they have entered the country to make their brands visible to the huge Indian market.

If FDI is allowed in retailing, franchisees are not very sure whether they would hold the retailing

rights for the brands. According to industry representatives, since franchisees largely constitute

of domestic traders (even some unorganized retailers have taken up franchising rights) who have

made significant investment in infrastructure, government through legislation must ensure that

they do not lose out their franchising rights if FDI is allowed in retailing and the franchisers

decide to change the mode of operation. The existing franchisees have also expressed an interest

in entering into joint venture with the franchisers if FDI is allowed in retailing.

(c) Test Marketing:Test marketing is another route through which many foreign players have

entered the Indian market. Foreign investment Promotion Board (FIPB) allows foreign

companies for test marketing of their products for a two-year period by the end of which they are

required to set up manufacturing facilities in India. Direct selling companies like Amway and

Oriflame entered the Indian market through this route. Initially, Amway got an approval for test

marketing for a period of two years but they managed to secure an extension of one more year.

At the end of the third year, they set up contract manufacturing facilities and brought in foreign

investment and technical know-how. Oriflame too extended its test marketing license for a third

year and at the end of which had set up a manufacturing facility in Noida (UP) for producing

certain specific products. Other products are imported and would continue to be imported from

abroad. Nokia came to India through the test marketing route in mid-1990s. Initially they got a

license for two years to test their products in the Mumbai circle. After three months of their entry

they tied up with the service providers to provide integrated services to their customers. Due to

pressure from the FIPB, Nokia had tied up with the HCL Infotech as a strategic partner for all

India distribution of Nokia products. After the success of its products in the country, Nokia had

opened up an office but had not set up a manufacturing facility and continued to import all


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products (even models made specifically for India). After another two years they divided the

country into four zones and entered into a strategic alliance for distribution with Supreme for

East and West India while HCL continued with North and Southern zone. Nokia had also applied

for the cash and carry license from the FIPB and has recently got the license. Nokia is

aggressively targeting the Indian consumers and plan to capture 75 percent of the mobile market

in the next seven years. The company, which currently operates as a wholesale cash-and carry,

recently announced that it would set up manufacturing facilities very soon. The test marketing

route allows foreign players to test the demand for their products in Indian market before

undertaking investment. Even if FDI is allowed in retailing, many foreign players would like to

enter the Indian market through this route.

(d) Wholesale Cash-and-Carry Operation: This is the route through which large international

retailers such as Germany's Metro Cash & Carry GmbH and Shoprite Checkers of South Africa

have entered the Indian market. The wholesale cash-and-carry operation is defined as any trading

outlets where goods are sold at the wholesale rate for retailers and businesses to buy. The

transactions are only for business purposes and not for personal consumption as in the case of

retailing.

(e) Distributor:Companies such as Swarovski and Hugo Boss have set up distribution offices in

India and these offices supply the products to local retailers. All products of Hugo Boss are

imported and distributed through the company's distributor.

(f) Special Cases:The Sri Lankan retailers have entered the India market through the initiatives

of Export Development Board of Sri Lanka (EDB) which obtained special permission from the

RBI to set up retail operations in India. The EDB has leased 17 retail outlets in Spencer Plaza in

Chennai in which Sri Lankan retailers are showcasing and selling their products. The Sri Lankan

products showcased in these stores are mostly at the higher end of the quality spectrum and can

be brought into the country free of duty. This gives an advantage to large Sri Lankan retailers

like Hameedia not only to establish a global presence but also to access the large customer base

of India at competitive prices. The EDB is also exploring the possibilities of setting up similar

trade centers in other cities like Delhi and Mumbai. Although this mode has allowed retailers

from Sri Lanka to enter the Indian market without domestic manufacturing and sourcing

conditions and some products sold by these traders are similar to those sold by Indian retailers,

EDB did not face any opposition from Chambers, retailers and the trading houses.


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Although the official policy is that FDI in retailing is allowed only in one brand and that too up

to 51% in retailing, but it has not acted as an entry barrier. Foreign players have a substantial

presence in the country and have used several alternative unique routes to enter Indian Trading

Sector.


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Bibliography

Reports

y Global retail development index/2005/2006/2007y Trade and foreign investment /comparing India and china/Stanford university/June1-

3/2006y FDI in Retail Sector in India, Department of Consumer Affairs, Ministry of Consumer

Affairs, Public and Food Department, Government of India.

y The great Indian retail story/Ernst & young report/Page 8/9/10y Foreign direct investment policy/April 2006y International Experience on Policy Issues/India vs. Chinay Alan Rosling/Chairman, Jardine Matheson Group India/ FICCI Footfalls

15thNovember 2002/New Delhi

y Reserve bank of India/Financial highlightsy http://worldbank.org/data/countrydata/aag/ind/ag.pdf

Websites

y http://www.economywatch.com/foreign-direct-investment/fdi-indiay http://www.indiafdiwatch.org/index.php?id=47y www.indiastatistics.comy http://www.atkearney.com

interim report kundal

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