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Introduction of FDI in multi brand retail in India is a hotly debated topic
currently. FDI is presently allowed only in cash-n-carry format (100%)
and single brand retailing (upto 51%). In this report, we highlight various
issues, opinions of industry participants and put forth our thoughts on
potential manner for allowing FDI in multi-brand retail. Existing retailers
like Pantaloon Retail, Shoppers Stop (for Hypercity format), Bharti
Retail*, Trent, Reliance Retail* and Aditya Birla Retail* could be
potential beneficiaries.
Calibrated approach likely. Our own expectation is that FDI norms
will likely be relaxed in a phased manner so that domestic retailers are
given sufficient time to achieve scale before facing full fledged foreign
competition. Option to partner with domestic retailers also provides
foreign retailers with understanding of local mindset, product and format
preferences. Limitations in terms of % ownership (49-51% most talked
about) and geographical presence (towns over 1MN+ population or six
metros) are likely as per industry participants.
FDI to aid capital investments; competitive challenges to rise over
medium term. FDI would benefit capital constrained Indian retailers,
accelerating pace of investments in the supply chain to meet demands of
increasing scale and enhancing efficiencies (offering competitive prices),
besides expertise of foreign retailers. Increased sourcing by foreign
players for their other overseas operations is another positive. An
offshoot of this would be increased competition amongst organised retail
chains over medium to long term. However considering that modern
retail is still in its infancy (~5-7% share), we believe players are likely to
co-exist comfortably. It would also not be easy for new players to negate
the location, rentals and supply chain advantages that existing players
enjoy. Within categories, we expect global food and grocery chains to
offer firm competition to domestic retailers relative to other segments.
Learnings from other markets. While foreign investments have
accelerated growth of modern trade in a significant manner across most
developing countries, there have been mixed experiences for foreign
retailers (vs local modern retailers) across formats. While China,
Thailand and Indonesia have seen successful expansion by foreign
players, local players too have fared well in China, Indonesia, Russia and
Chile.
What are the hindrances? Political consensus is difficult to reach in
this case given fears related to predatory pricing by foreign players and
risks to employment of people involved in retail trade. Further extent of
involvement of state govt in decision making process is still being
debated.
Status of FDI in India Retail
In India currently FDI is not allowed in retail except for cash-n-carry wholesale
format (upto 100%) and single brand retailing (upto 51%). In July 2010 DIPP
released a discussion paper on opening of the sector and various stakeholders have
submitted their feedback on the same. Smaller retailers have opposed introduction of
FDI in multi-brand retail while organized Indian and foreign retailers have welcomed
this potential move.
FDI in single brand retailing was permitted in 2006, to the extent of 51%. An FDI
inflow of US$195mn was received between April’06 -Mar’10, under single brand
retailing.
FDI in cash and carry wholesale trading was first permitted, to the extent of 100%,
under the Government approval route, in 1997. It was brought under the automatic
route in 2006. Between Apr’00-Mar’10 FDI inflows of US$ 1.8bn were received in
the sector.
As per news reports (Telegraph, CNBC), the Committee of Secretaries (CoS) will
likely meet later this week (July 22) and try to resolve inter-ministerial differences
and then prepare a cabinet note for clearance to allow FDI in multi-brand retail.
Potential forms of FDI introduction
Lot has been discussed about potential riders associated with relaxation of FDI norms
in multi-brand retail. We present below key ones being talked about.
Ownership restriction: There are varied opinions on the extent of FDI cap to be
allowed for foreign retailers in multi-brand retail. While the Department of
Industrial Policy and Promotion favors 51% FDI cap, Ministry of Consumer Affairs
(MCA) is pitching for 49% cap to ensure control remains with Indian nationals.
Geographical restriction: There are two schools of thoughts here. Commerce
ministry proposed all cities with 1Mn+ population to be allowed (~50 cities) for
retail FDI. However, some of other ministries want a more calibrated approach in
opening up FDI in retail. Many of these advocate that Retail FDI should first be
experimented with six metro cities, and then gradually rolled across other cities. It is
important to note that for existing big retailers like Pantaloon and Shoppers, top six
cities account for ~45-70% of their retail sales.
Other issues: Some of the key issues set for resolution in context of allowing FDI in
multi-brand retail out in discussion paper by DIPP are:
a) Setting up of a minimum threshold limit for investment ~$100mn) of which
a percentage (~50% suggested) should be spent towards building up of
back-end infrastructure, logistics and agri processing.
b) Conditions be put relating to employment. For example, at least 50% of the
jobs in the retail outlets should be reserved for the rural youth.
c) To stipulate a minimum percentage of manufactured products be sourced
from the SME sector in India (~30% being suggested)
State approval still required? There is also a debate on if retailers would need to
take approvals from different states as trade comes under state purview. The negative
fallout of involving states in decision making process is 1) Lengthy time to reach a
decision; 2) Political consensus is difficult to arrive at particularly in case of states
ruled by opposition/regional parties.
Possible impact on Indian Retail Market
Introduction of FDI in multi-brand retailing would benefit capital constrained Indian
retailers, accelerating pace of investments in the supply chain to meet demands of
rising scale and enhancing efficiencies besides expertise and experience of foreign
retailers. Increased sourcing by foreign players for their other overseas operations is
another positive.
At a more macro level, benefits of increased share of modern trade would include
availability of more choice to consumers, ability to offer more competitive prices
(aided by more efficient supply chains), creating significant ‘formal’ employment
opportunities and effective tax collection (vs unorganised trade). There are potential
benefits of accessing global best retail practices, technical knowhow and more closer
inclusion of producers (farmers) with retailers.
In response to DIPP discuss paper, Carrefour stated that as per their estimates, if
Carrefour starts its retail operations in India, in about 10 years they would provide
direct and indirect employment opportunities to approximately 20,000 people in the
stores itself. They also mentioned that as per their forecasted plan for India,
Carrefour would source approximately 90% of its range of assortments locally.
In India, some foreign retailers (Walmart, Metro, Carrefour) are also taking the
wholesale route to be ready if FDI is allowed in multi-brand retail. They are already
operating via the cash-n-carry route (where 100% FDI is permitted) to gain on
ground experience regarding consumer behavior, product usage and supply chain
requirements in the country.While we have discussed the benefits of allowing FDI above, an offshoot of this
would be increased competition amongst organised retail chains over medium term.
However, considering that retailing is still in its infancy in India and the consumption
outlook is strong, we believe 5-6 players are likely to co-exist comfortably in such a
high growth industry. It would also not be easy for new players to negate the
location, rentals and supply chain advantages that existing players enjoy.
Learnings from other markets
We discuss below key developing markets where FDI in retail was introduced in a
phased manner and likely impact of the same on growth rates of modern trade there.
China
China opened its retail sector for first time to retailers in 1992. In the first phase, they
allowed retailers to establish joint ventures in six Chinese cities i.e. Beijing,
Shanghai, Tianjin, Guangzhou, Dalian, and Qingdan and five special economic zones
of Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan. China relaxed its FDI
restrictions in calibrated manner. Initially FDI cap in China was 49% in 1992. China
lifted restrictions on locations, ownership structures, and total number of stores in
2004.
Thailand
Thailand permits 100% foreign equity in retail, with no limit on the number of
outlets. Prior to 1997, no foreign investment was allowed and hence the domestic
retail sector faced limited competition and thus had few incentives to upgrade their
operation. With the start of the Asian crisis in 1997, the entry ban on foreign players
was removed and they expanded their operations significantly and marginalised local
retailers. The modern retailers took market share from the traditional forms – from
nearly zero to about 55% currently
Indonesia
FDI investments in retail were introduced in Indonesia in 1995. While many of the
MNC retailers such as Walmart, Centenial were deterred by the Asian financial
crisis, Carrefour, Makro and Delhaize Group SA stayed. Carrefour eventually leads
the industry at hypermarkets while Delhaize Group SA along side its partners Salim
Group leads the supermarket segment. Makro was eventually bought out by Lotte.
However, the story in Indonesia is home grown retailers which managed to challenge
even the global retailers: Matahari, Alfamart, Indomaret, Mitra Adi Perkasa, Yaohan,
Yogja, Ramayana, Aces Indonesia, etc. Small stores either closed or joined the
franchise system of Alfamart and Indomaret. These two chains have 11,000 stores
combined (100-200 sqm per store) across Indonesia and its growing at the rate of
2,000-3,000 stores per annum. They are asking the traditional mum and pop to join
their franchise and capitalize on their purchasing and bargaining power within the
whole chain.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Introduction of FDI in multi brand retail in India is a hotly debated topic
currently. FDI is presently allowed only in cash-n-carry format (100%)
and single brand retailing (upto 51%). In this report, we highlight various
issues, opinions of industry participants and put forth our thoughts on
potential manner for allowing FDI in multi-brand retail. Existing retailers
like Pantaloon Retail, Shoppers Stop (for Hypercity format), Bharti
Retail*, Trent, Reliance Retail* and Aditya Birla Retail* could be
potential beneficiaries.
Calibrated approach likely. Our own expectation is that FDI norms
will likely be relaxed in a phased manner so that domestic retailers are
given sufficient time to achieve scale before facing full fledged foreign
competition. Option to partner with domestic retailers also provides
foreign retailers with understanding of local mindset, product and format
preferences. Limitations in terms of % ownership (49-51% most talked
about) and geographical presence (towns over 1MN+ population or six
metros) are likely as per industry participants.
FDI to aid capital investments; competitive challenges to rise over
medium term. FDI would benefit capital constrained Indian retailers,
accelerating pace of investments in the supply chain to meet demands of
increasing scale and enhancing efficiencies (offering competitive prices),
besides expertise of foreign retailers. Increased sourcing by foreign
players for their other overseas operations is another positive. An
offshoot of this would be increased competition amongst organised retail
chains over medium to long term. However considering that modern
retail is still in its infancy (~5-7% share), we believe players are likely to
co-exist comfortably. It would also not be easy for new players to negate
the location, rentals and supply chain advantages that existing players
enjoy. Within categories, we expect global food and grocery chains to
offer firm competition to domestic retailers relative to other segments.
Learnings from other markets. While foreign investments have
accelerated growth of modern trade in a significant manner across most
developing countries, there have been mixed experiences for foreign
retailers (vs local modern retailers) across formats. While China,
Thailand and Indonesia have seen successful expansion by foreign
players, local players too have fared well in China, Indonesia, Russia and
Chile.
What are the hindrances? Political consensus is difficult to reach in
this case given fears related to predatory pricing by foreign players and
risks to employment of people involved in retail trade. Further extent of
involvement of state govt in decision making process is still being
debated.
Status of FDI in India Retail
In India currently FDI is not allowed in retail except for cash-n-carry wholesale
format (upto 100%) and single brand retailing (upto 51%). In July 2010 DIPP
released a discussion paper on opening of the sector and various stakeholders have
submitted their feedback on the same. Smaller retailers have opposed introduction of
FDI in multi-brand retail while organized Indian and foreign retailers have welcomed
this potential move.
FDI in single brand retailing was permitted in 2006, to the extent of 51%. An FDI
inflow of US$195mn was received between April’06 -Mar’10, under single brand
retailing.
FDI in cash and carry wholesale trading was first permitted, to the extent of 100%,
under the Government approval route, in 1997. It was brought under the automatic
route in 2006. Between Apr’00-Mar’10 FDI inflows of US$ 1.8bn were received in
the sector.
As per news reports (Telegraph, CNBC), the Committee of Secretaries (CoS) will
likely meet later this week (July 22) and try to resolve inter-ministerial differences
and then prepare a cabinet note for clearance to allow FDI in multi-brand retail.
Potential forms of FDI introduction
Lot has been discussed about potential riders associated with relaxation of FDI norms
in multi-brand retail. We present below key ones being talked about.
Ownership restriction: There are varied opinions on the extent of FDI cap to be
allowed for foreign retailers in multi-brand retail. While the Department of
Industrial Policy and Promotion favors 51% FDI cap, Ministry of Consumer Affairs
(MCA) is pitching for 49% cap to ensure control remains with Indian nationals.
Geographical restriction: There are two schools of thoughts here. Commerce
ministry proposed all cities with 1Mn+ population to be allowed (~50 cities) for
retail FDI. However, some of other ministries want a more calibrated approach in
opening up FDI in retail. Many of these advocate that Retail FDI should first be
experimented with six metro cities, and then gradually rolled across other cities. It is
important to note that for existing big retailers like Pantaloon and Shoppers, top six
cities account for ~45-70% of their retail sales.
Other issues: Some of the key issues set for resolution in context of allowing FDI in
multi-brand retail out in discussion paper by DIPP are:
a) Setting up of a minimum threshold limit for investment ~$100mn) of which
a percentage (~50% suggested) should be spent towards building up of
back-end infrastructure, logistics and agri processing.
b) Conditions be put relating to employment. For example, at least 50% of the
jobs in the retail outlets should be reserved for the rural youth.
c) To stipulate a minimum percentage of manufactured products be sourced
from the SME sector in India (~30% being suggested)
State approval still required? There is also a debate on if retailers would need to
take approvals from different states as trade comes under state purview. The negative
fallout of involving states in decision making process is 1) Lengthy time to reach a
decision; 2) Political consensus is difficult to arrive at particularly in case of states
ruled by opposition/regional parties.
Possible impact on Indian Retail Market
Introduction of FDI in multi-brand retailing would benefit capital constrained Indian
retailers, accelerating pace of investments in the supply chain to meet demands of
rising scale and enhancing efficiencies besides expertise and experience of foreign
retailers. Increased sourcing by foreign players for their other overseas operations is
another positive.
At a more macro level, benefits of increased share of modern trade would include
availability of more choice to consumers, ability to offer more competitive prices
(aided by more efficient supply chains), creating significant ‘formal’ employment
opportunities and effective tax collection (vs unorganised trade). There are potential
benefits of accessing global best retail practices, technical knowhow and more closer
inclusion of producers (farmers) with retailers.
In response to DIPP discuss paper, Carrefour stated that as per their estimates, if
Carrefour starts its retail operations in India, in about 10 years they would provide
direct and indirect employment opportunities to approximately 20,000 people in the
stores itself. They also mentioned that as per their forecasted plan for India,
Carrefour would source approximately 90% of its range of assortments locally.
In India, some foreign retailers (Walmart, Metro, Carrefour) are also taking the
wholesale route to be ready if FDI is allowed in multi-brand retail. They are already
operating via the cash-n-carry route (where 100% FDI is permitted) to gain on
ground experience regarding consumer behavior, product usage and supply chain
requirements in the country.While we have discussed the benefits of allowing FDI above, an offshoot of this
would be increased competition amongst organised retail chains over medium term.
However, considering that retailing is still in its infancy in India and the consumption
outlook is strong, we believe 5-6 players are likely to co-exist comfortably in such a
high growth industry. It would also not be easy for new players to negate the
location, rentals and supply chain advantages that existing players enjoy.
Learnings from other markets
We discuss below key developing markets where FDI in retail was introduced in a
phased manner and likely impact of the same on growth rates of modern trade there.
China
China opened its retail sector for first time to retailers in 1992. In the first phase, they
allowed retailers to establish joint ventures in six Chinese cities i.e. Beijing,
Shanghai, Tianjin, Guangzhou, Dalian, and Qingdan and five special economic zones
of Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan. China relaxed its FDI
restrictions in calibrated manner. Initially FDI cap in China was 49% in 1992. China
lifted restrictions on locations, ownership structures, and total number of stores in
2004.
Thailand
Thailand permits 100% foreign equity in retail, with no limit on the number of
outlets. Prior to 1997, no foreign investment was allowed and hence the domestic
retail sector faced limited competition and thus had few incentives to upgrade their
operation. With the start of the Asian crisis in 1997, the entry ban on foreign players
was removed and they expanded their operations significantly and marginalised local
retailers. The modern retailers took market share from the traditional forms – from
nearly zero to about 55% currently
Indonesia
FDI investments in retail were introduced in Indonesia in 1995. While many of the
MNC retailers such as Walmart, Centenial were deterred by the Asian financial
crisis, Carrefour, Makro and Delhaize Group SA stayed. Carrefour eventually leads
the industry at hypermarkets while Delhaize Group SA along side its partners Salim
Group leads the supermarket segment. Makro was eventually bought out by Lotte.
However, the story in Indonesia is home grown retailers which managed to challenge
even the global retailers: Matahari, Alfamart, Indomaret, Mitra Adi Perkasa, Yaohan,
Yogja, Ramayana, Aces Indonesia, etc. Small stores either closed or joined the
franchise system of Alfamart and Indomaret. These two chains have 11,000 stores
combined (100-200 sqm per store) across Indonesia and its growing at the rate of
2,000-3,000 stores per annum. They are asking the traditional mum and pop to join
their franchise and capitalize on their purchasing and bargaining power within the
whole chain.
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