Magazine 2013
International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
FDI In Multi-Brand Retail: Boon Or Curse?
Kshama Kadam & S. G. Vibhute
ABSTRACT
Retail is the final stage of any sale conclusion. By virtue of this fact, retail occupies an important
place in the world economy. The Indian retail sector is one of the fastest growing sectors, with several
players entering the market. In today’s era of liberalization, privatization and globalization the entire
economy is opening up gradually. India has witnessed a frenetic pace of retail development over the
past five years. The Indian retail sector has already allowed 51% FDI in single-brand retail and 100 % in
wholesale or cash and carry trading. And now there is a proposal of the Department of Industrial Policy
and Promotion (DIPP) to allow51% FDI in multi-brand retailing. So whether to accept this proposal or not
is the question in front of Indian Government. The paper covers the current FDI norms and various
challenges associated therewith. It does a critical evaluation of the Pros and Cons associated with FDI in
Retail India. Basis findings, it has tried to bring out the possibility of co existence between the unorganized
retailing in India on one hand and the Multi National Giants on the other. It concludes with certain
suggestions through which the FDI can be allowed in India through a well monitored, regulated and
calibrated approach to ensure maximum benefits with least impact on the existing Indian retail industry.
Keywords - Frenetic, Cash, Carry Trading, DIPP, Multi-Brand Retail
Introduction
FDI in Retail” is catching front page headlines of leading news papers, almost every alternate day. The
“
subject has not only gathered importance at level of national economics but also has a bearing on the country’s
image at international levels in terms of policies conducive for overseas investors.
Recently UPA Government has cleared the entry of multi-brand retail with certain riders in terms of
minimum investment of 100 million USD and half of it into back-end infrastructure in rural India. 30% of value of
goods to be purchased from small and mid-size suppliers, stores to be put up in cities with minimum 1 million
population, and above all, subject to permission of individual state government. MNC seek an assurance in
permits even if the ruling parties change in State governments. Opposition parties and some UPA allies have
expressed their opposition.
Today it is quite evident that there is no consensus within the ruling parties and the state governments
with regards to allowing FDI in Retail.
Until early 90s, India had a very restrictive approach towards inviting foreign capital by way of investments
for bringing in desired developments. However, the Industrial Policy 1991 was the first progressive step in this
direction where FDI was allowed selectively up to 51% in certain priority sectors. Since then a positive approach
towards FDI has been gathering momentum and the same is viewed as a tool to address the BOP situation.
1997 saw FDI being allowed up to 100% in sectors like mining, manufacturing and in cash and carry (wholesale)
under the government approval route. FDI in India constituted a small per cent of Gross fixed capital formation
in 1993, which went up to 4 per cent in 1997. Beginning 2000, several other specific sectors were opened for
1
00% FDI, procedures simplified and FDI limits increased. 2006 saw 100% limit in cash and carry (wholesale)
being brought under the automatic route. Today, 51% FDI is allowed in single brand retail through the Government
approval route and 100% FDI is allowed in the cash and carry (wholesale) business under the Automatic route.
Objective
This paper briefly discusses and critically evaluates the pros and cons associated with FDI in retail.
It also intends to summarize some of the key factors associated with this aspect and touch upon the
widely publicized controversies around this subject.
Research Methodology
The study is confined to implications of FDI in retail industry and is based on secondary data collected
from various sources like retail editions, business journals, news articles and reports by various institutions and
banks.
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International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
Overview of the Retail Sector in global perspective
Retail is one of the largest industries in the world exceeding USD 11 trillion, primarily dominated by
developed economies with US, EU and Japan constituting 80% of world retail sales. 47 of the Global Fortune
companies and 25 of Asia’s top 200 companies are retailers. Fortune # 1 “Wal-Mart” is a retailer
Operating in thirteen markets world wide, Wal-Marts global market entry strategy has been expansion through
Organic growth coupled by acquisition and joint ventures.
•
•
It established international operations with Mexico in 1991.
In 2009, it recorded turnover of USD 77 billion from its international operations, which was 22% of its
total sales.
Retailing in China
Retail sales have grown @ 13.5% CAGR since FDI was allowed in 1992. FDI was initially restricted to 6
major cities including Beijing and Shanghai and SEZs. Foreign ownership was initially restricted to 49% to be
phased out over a period of 5 years as a part of the WTO entry condition. In the later phase, retail sales grew @
1
9.6% CAGR
Employment in retail industry has also shown improvement since 1992. % of employment has
improved from less than 5% in 1992 to 7.5% in 2001
Wal-Mart entered China in 1996. Bloomberg reported that as of October 2011, Wal-Mart’s China
sales totaled $7.5 billion.
Carrefour, second largest retailer in the world, reached a count of 157 outlets in China in 2009 and
planned to open more outlets in coming years.
Learning from retailing in China
Post FDI inflow, retailing has grown at a CAGR of 15% and the industry has further expanded
Employment opportunities created
Modern formats introduced
Local retail outlets co exist with multinational giants
India’s Potential for Retail
Indian economy continues to grow at 7 – 8% GDP and retail contributes 12% of GDP as against almost
2
0% for the USA and 14% for Japan. Retail in India is second largest to provide employment (8% of its working
population), only next to agriculture. Considering certain demographics and a comparative analysis between
organized and un organized retail at global levels, we find that only 5% of India’s retail business is through
organized retail as against 85% for U.S., 80% for Taiwan and 20% for China. However, Year 2007 registered
robust growth rate of organized retail to acquire 8 per cent share of overall retail in India. Organized sector
comprises of retailing undertaken by licensed retailers i.e. those registered with income tax, sales tax, etc.
These include hyper markets and retail chains backed by corporate houses as well as privately owned large
retail businesses. Un organized sector comprises of the regular Kirana and mom and pop stores, convenience
stores, hand carts, pavement vendors etc.
2005 to 2007, India topped A.T. Kearney’s Global Retail Development Index (GRDI) as the world’s most
attractive destination for mass merchant and food retailing in an annual study of retail investment attractiveness
among thirty emerging markets. But in 2008, Vietnam displaced India from the top position by emerging as the
most attractive destination.
A.T. Kearney Global Retail Development Index, 2008
(
This Index shows year on year ranking of countries under study with regards to most
attractive destination for retail investments)
Country
Vietnam
India
2008 Rank
2007 Rank
Change
1
2
3
4
4
1
2
3
+3
-1
Russia
China
-1
-1
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Source: www.atkearney.com (2009)
RH, VOL. 3 JULY 2013
Improving per capita and population demography comprising of huge proportion of youngsters, favors a
demand for branded goods, better infrastructure etc. (average age of 25 years, 60% of population below age
of 30 and increasing awareness through worldwide connectivity) Spending power has significantly increased
and there is a shift in focus from low price to convenience, value chain and superior shopping experience.
Spending shift is seen from food products to non food products as travels, apparels, consumer durables etc.
There is a dramatic shift in consumer class from lower to middle and upper class. Consumer class is estimated
to grow from 50 million to 583 million by 2025. In a nutshell, the retail sector in India handles more than 200
billion USD every year and same is estimated to grow to more than 600 billion USD by end of 2015 as per
veteran economists. Of this, the organized sector would show a growth of 15 – 20 % every year.
Outlook of foreign investors with regards to FDI in retail India
Ambiguous regulations and relaxation in norms: No consensus within the ruling party and state
governments creates anxiety within the investors to set up shop. While conglomerates like Wal-Mart, Tesco etc
are keen to invest billions of USD to set up infrastructure in India, they seek relaxations in certain existing
restrictions.
Limited applicability: Retail chains in consumer durables like LG & Samsung, food chains like Pizza
Hut or services like Kangaroo kids have an established franchisee network in India. They are unlikely to immediately
shift even if there is a relaxation in existing norms.
Challenge in identifying good partners: Given the constraints in terms of capping the investments in
infrastructure, identifying a reliable partner for a JV in India remains a challenge. While options remain to tie up
with existing retail chains in the like of Shoppers Stop or Pantaloons, they may choose to tie up with Business
houses like Bharti where Wal-Mart has entered into a JV.
Complex procedures to seek clearances: Another challenge is the multiple clearances needed before
setting shop. Single window solution is sought. Wal-Mart India President and Bharti Wal-Mart Managing Director
Raj Jain once stated “If you look at some other emerging markets like China, the Philippines, Indonesia, Brazil,
or Mexico, you will find these are ahead of India by anything between five and 20 years. India has a lot of
catching up to do.”
Despite above, when Wal-Mart opened its first outlet in 2009, it is estimated to have invested around Rs
1
,500 crore in India and plans to scale up investments further. Germany-headquartered euro 31-billion Metro
Cash & Carry, already has 11 stores in India, and is estimated to have invested around Rs.1,600 crore in the
country since 2003, when it set up the first outlet. Though current revenue is learnt to be just one per cent of the
global sales, or around Rs 2,200 crore, the company aims at reaching five per cent of its international revenue
from India sales by 2015. It plans to open around 50 stores in India over next four to five years with investments
over Rs 3,500 crore. Carrefour, the second largest retailer in the world with revenues around euro 112 billion set
up shop in India towards end of 2010 and is keen to expand. Euro 25 billion Swedish furniture giant IKEA’s
proposal is currently under consideration with India. The company wants to invest euro 1.5 billion (around Rs
1
0,500 crore) here over a period of 15 to 20 years. While this investment appears meager compared to the size
of Wal-Mart, more so since India’s spend on furnishing is much lower as compared to spend on food items,
consumer durables and apparel, this is an indication of the positive sentiment of foreign investors towards India
in current scenario
Wal-Mart and Prudential Financial are known to lobby hard with their lawmakers to garner support for
business expansion plans in India and have already spent millions of dollars to address issues on FDI in India,
changing framework of Indian taxation etc.
Current provisions of FDI policy with respect to Retail Industry in India
1
)
FDI up to 100% for cash and carry (wholesale trading) allowed under automatic route
FDI up to 51% with prior Government approvals (FIPB approvals) for retailing in “Single Brand Products”
FDI in Multi Brand Retailing – not permitted
2)
3)
Though not explicitly authorized, most players have been operating even prior to relaxation of FDI
norms in 2006 either through Franchisee Agreements, well drafted strategic alliances, wholly owned subsidiaries,
Cash and carry etc
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International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
Franchisee agreement has been the most common route adopted by several successful chains like
Pizza Hut, Kangaroo Kids, Lacoste, Nike, Mango, Marks and Spencer etc. Under franchisee, FDI is allowed by
RBI under FEMA.
Others adopt JV where international partner provides equity and technology support to Indian investors. Indian
partner provides all local knowledge required in such a venture. Mac Donalds and Reebok have adopted such
a route.
Foreign brands like Benetton, Adidas, and Reebok have their wholly owned subsidiaries or manufacturing
units set up and as such are treated as Indian companies and allowed to retail.
Companies also set up distribution offices in India and trade through local Indian retailers. E.g. Swarovski
and Hugo Boss operate in India through this route.
Some of the rules governing FDI in Single Brand Retail - Irony
To protect small manufacturers from perceived aftermath of big retailers setting shop in India, current
sourcing rules for single brand retailers stipulate that local suppliers cannot have more than USD 1 million
invested in plant and machinery. While the intent was to protect the manufacturing sector of the country from
otherwise imports, it has certain adverse implications:
1)
Capping creates challenge for retailers to identify reliable suppliers with good infrastructure facilities
who can cater to their standards of output
2)
Provisions in policy documents state that Indian companies would be disqualified from supplying to
foreign firms if their investments in infrastructure grew beyond USD 1 million cap. This indirectly means
penalizing success.
3)
Only single brand products would be sold (retailing of different brands, though manufactured by same
producer cannot be sold under same arrangement) eg. If Adidas obtains permission to retail its Adidas
brand in India, it cannot retail products under the Reebok brand. A separate permission and outlet
arrangement would be required to sell these.
4)
Single brand would only cover products branded at manufacturing stage. This means large departmental
stores cannot enter India as typically they source these products locally and brand them subsequently
5)
Any addition to product categories to be sold under single brand would require fresh approvals from
government
Concerns of the government for opening up FDI in Retail India
a) Almost 95% of India’s retail industry is unorganized and characterized with lack of professionalism, low
capital and infrastructure, family run set up, low focus on quality and shopping experience etc. Traditional mom
and pop stores offer employment to family members during lean agricultural seasons or in case of unemployment
with no other avenues available. The industry is inhibited with underemployment. MNC would bring unfair
competition leading to complete wipe out of unorganized retail industry which comprises of more than 12
million Kirana stores. With the manufacturing sector also progressing very slowly, the displaced population
may be jobless.
b)
Organized retail is at very nascent stage and needs to get established and stabilize to face these
giants. With their muscle power, the MNCs would displace existing distribution network and resort to monopolistic
practices, forming cartels etc
c)
Absence of proper regulatory framework would lead to unfair trade practices and predatory pricing.
These giants would continue to sell products at prices unsustainable for small retailers thereby wiping them out
d) FDI may widen urban rural divide. Most retail outlets would be set up in and around urban areas where
infrastructure facilities, population density and per capita income is higher. These outlets would attract cheap
labor from rural areas thereby depriving agriculture of the needed workforce. Unplanned expansion in urban
areas would stretch existing infrastructure (roads, parking spaces etc)
e)
There is a fear that global giants would use India as dumping ground for their sub standard and
outdated products.
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International Peer-Reviewed Journal
However, not all concerns raised above may actually materialize if FDI is allowed in a perfectly regulated
and calibrated manner
RH, VOL. 3 JULY 2013
Opening up the telecom sector for FDI worked by bringing in a telecommunication revolution which
embraces everyone today. Foreign investments in automobile industry ended the long wait for outdated scooters
and cars and led to leading global companies vying to open shop in India.
When Pizza Hut, Domino’s, McDonald’s, Burger King, KFC and other international brands were allowed,
there were demonstration in many cities; they were painted as anti-people and anti-Indian enterprises. It was
feared that domestic food chains like Haldirams, Bikanerwalas, Nirulas, Nathus etc will vanish. But all these
Indian chains have only multiplied their outlets, diversified their production line, upgraded packing and
presentation, and are doing roaring business.
In playschool space while Kangaroo Kids made an entry, domestic playschools like Tree House also
flourished
Current challenges in Indian Retailing
a)
b)
Almost 95% of the industry is un organized with incompetent management and inadequate infrastructure
Poor supply chain including government run PDS leads to pilferage of grains being eaten by mice etc.
These losses amount to thousands of crores and are one of the major contributors to food inflation.
c)
d)
e)
Poor warehousing, cold storage and transport
Supply chain dominated by intermediaries leading to minuscule realization by farmers
Outdated/ lack of technology
Benefits of allowing FDI in retailing in India
Research conducted by the Indian Council for Research on International Economic Relations (ICRIER)
has revealed that there is no evidence of overall decline in the employment of the Unorganized retailing sector
as a result of the advent of FDI in organized retailing and that the rate of closure of small shops for the same
reason is very minimal.
One of the major challenges faced by Indian agriculture is inadequate infrastructure through which the
farmers would gain direct access to vast markets. This would not only eliminate unnecessary intermediaries,
but also enable farmers to sell their produce at much lower prices and still fetch a good sum. Lack of proper
warehousing and cold storage facilities forces the farmers to sell their produce at meager prices. While 100%
FDI is permitted to invest in setting up the backend infrastructure, the same is not much forthcoming owing to
restrictions on FDI in front end retailing. If FDI is permitted in retailing, these multi national giants can be
induced to bring in huge capital investments and technology to set up the back end infrastructure and
warehousing facilities, which would take years for our government to build up. This would significantly reduce
the wastage of food produce and tame inflation. The resultant rural prosperity would bring about a balanced
economic progress
Other industry to benefit is the SME. These manufacturing units do not have adequate infrastructure to
access overseas markets. With the Retail giants setting up shop in India, they would not only start procuring
material locally for domestic sale but could also buy for exporting back to their countries. This would open up
huge export opportunities for the SME sector.
Below is a snapshot of some of the obvious benefits
a)
b)
c)
d)
e)
f)
Improved supply chain management resulting in reduced wastages and price reductions.
Farmers benefit through direct marketing and contract farming.
Improved farm production through modern techniques.
Advanced Technology and Skilled Manpower development.
Efficiency building in SME.
Improved exports.
g)
h)
Employment opportunities.
Tax revenue for government.
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Co-existence Possible
RH, VOL. 3 JULY 2013
There is every opportunity for the existing Kirana stores to co-exist with these MNC giants as there are
certain inherent advantages which they will continue to enjoy
a)
Local presence (residence or workplace) and easy access: It is very important in the Indian context
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-
-
-
Limited storage space at home leading to frequent trips to nearby retailers
Consumers prefer fresh grocery rather than storing in bulk and consume stale grocery
Personal vehicle penetration level in India is less than 10 per 1000 population (KPMG 2006)
Not many housewives drive down all the way to the malls to procure their monthly grocery requirements.
These continue to be met through local Kirana stores
Therefore people prefer to buy from nearby stores rather than spending on transport to buy from main markets
b)
Personal touch with customers and value added services: Home delivery, credit facility, returns and
adjustments etc. Personal touch enables retailers to advice customers on purchase of products most suitable
to them.
c)
Low operational overheads: Small retail outlets are generally self owned or run by protected tenants.
Not much expenses incurred on display and advertising. Family members provide labour and services.
Suggestions
To conclude, FDI in retail needs to be allowed in India in a calibrated manner.
1)
Existing demographic of Indian population and potential are enough inducers for foreign giants. The
government need not offer further subsidies
2)
Opportunities should be created to strengthen the organized retailing in India to enable it to sustain
competition from global giants
3)
FDI in front line retailing should be allowed subject to companies bringing in stipulated capital, technology
and managerial expertise to set up the backend infrastructure
4)
Norms should be specified where these retail outlets must procure a fixed percentage of their
requirements from domestic suppliers
5)
Norms must be specified where a certain percentage of their employee strength needs to comprise of
rural youth
6)
Proper regulatory framework and guidelines must be put in place to ensure that these giants do not
adopt monopolistic and unhealthy practices
7)
Single window clearances should be provided for setting up shop
8)
Restrict number of stores which can be opened in a city. This will ensure balance of expansion and
infrastructure support and reduce the rural – urban gap
Conclusion
In a nutshell, FDI in retailing is the need of the day and is here to come. India having emerged as a
progressive global economy needs to look at FDI in a broader perspective. There are definite advantages of
allowing FDI in retail if the same is introduced in a closely monitored and calibrated manner, so that FDI in Multi-
Brand retail will definitely turn out to be a boon and not a curse. Rightly said by Victor Hugo – “An invasion of
armies can be resisted, but not an idea whose time has come”
References
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Bajaj C. Tuli R., and Srivastava N., Retail Management, New Delhi: Qxford University Press,2005.Print.
Bryan R . and Berg N., Walmart, Great Britain and United States: Kogan Page Limited,2012. Print.
Pradhan S. Retailing Management, New Delhi: Tata McGraw-Hill, 2010. Print.
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th
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Agarwal P., and Tyagi E., Foreign Direct Investment in Indian Retail Sector – An analysis, Nov 24 ,2011.
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rd
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Batra H., FDI in retailing sector in India-Pros and Cons, Nov 3 2010. www.legallyindia.com.
th
Mookerji N., IKEA’s investment in India- a big deal?, New Delhi: Business Standard, July 19 2012.
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