FDI IN MULTI-BRAND RETAIL BUSINESS – OPPORTUNITIES AND CHALLENGES

Dr.P.G.ARULDept. of International BusinessPondicherry UniversityPondicherry - 605014

Retail Trends in India:

The total retail trade in India is estimated at USD 330 billion. Organized retail at 6 per cent (Rs.86400 crore 864 billion)

According to the Credit Rating and Information Services of India, the industry ranked in US $25.44 billion turnover in 2007-08 as against US $ 16.99 billion in 2006-07, a whopping growth rate of 49.73 per cent

97 per cent of this is accounted for by the 12 million traditional outlets ( the unorganized sector)

According to NCAER (National Council of Applied Economic Research), the Indian middle class (household income between US $4,500-23,000) currently stand at 92 million, is to cross 153 million by 2010.

Retail industry accounts for 35 percent of India’s GDP

WHY INDIA IS WORRIED ABOUT FDI IN RETAILING?

Global retailers will kill the local ‘kirana’ industry

FDI in retail could lead to millions of job losses Global retailers will put pressure on farmers

and suppliers Predatory pricing policies will lead to

monopolies and harm the consumer Global retailers will trigger growth in cities,

causing skewed urban development

FDI in Single Brand ?

Foreign equity does not go beyond 51 percent Foreign Investment Promotion Board

(FIPB)/Department of Industrial Policy & Promotion (DIPP) approval has been issued

Products to be sold are of a Single Brand only Products are sold under the same brand

internationally Single Brand Products covers products that are

branded during manufacturing Additions to the product categories to be sold under

‘single brand require fresh Government approval

Benefits that follow from FDI in Retail Business

Faster take up of modern retail formats Improved productivity and efficiency on the retail sector Enhanced sourcing Improved quality of employment Investment in supply chain Reduced number of intermediaries because of closer integration

of suppliers, logistic service and retailers Linked local suppliers, farmers, manufacturers to global markets Low prices for consumers Improved product quality and service for consumers

As per the report prepared by FICCI and ICICI Property Services in Feb 2005,

FDI can be a powerful catalyst to spur competition in the retail industry.

It can bring about: • Supply Chain Improvement; • Investment in Technology;

Manpower and Skill development, • Tourism Development; • Up gradation in Agriculture; • Efficient Small and Medium Scale Industries; • Growth in market size, • Greater Productivity, • Benefits to government: through greater GOP, tax income and employment generation

International Experience

China has played a successful role in attracting FDI for the benefit of its economy, whereas India is lagging far behind.

Major determinants, China attracted high FDI flows are : a) China has more business-oriented policies; b) Its FDI procedures are easier; c) It has more flexible labor laws, a better labor climate and better entry-exit procedures for business entities.

The main reasons why India has low FDI flows are: a) Bureaucratic tangle; b) Infrastructural drawback; c) Labor inefficiency and unrest; d) Tax incentives; e) Procedural disputes; f) non-implementation of approved projects; g) Political instability; h) Corruption, etc. (Chary and Gangadhar,2006).

What India want to do?

Before allowing foreign direct investment focus should be on direct and indirect employment potential of each of these sectors in relation to the magnitudes of investments required.

The employment and investment implications may vary from sector to sector, region to region and rural to urban.

Such a study should necessarily cover all segments of the supply chain, so that the government may have a better appreciation of the total benefits and costs, in the short-term, as well as long term.

Before opening up the retail sector, the regulatory structures in the related sectors need to be strengthened; as otherwise, foreign players as well as the larger domestic retailers could exploit the traditional retailers.

It may not be desirable to open up retailing to FDI until reforms in the related sectors are undertaken and the competitiveness of domestic retailers is enhanced.

Contd.,

The government should examine the constraints faced by traditional retailers and other players in the supply chain and institute safety nets as has been done in Thailand and other countries in Asia.

Most Asian countries have put in place restrictions in terms of sourcing, capital requirement, zoning, etc., in order to regulate the expansion of organized retailing. India should draw lessons from this

The retail sector is a highly sensitive one because of its immense contribution to the economy. Decisions regarding FDI in this sector should not therefore be taken in haste.

Contd.,

FDI is welcome in sectors like lifestyle goods, home sectors, fashion and electronics.

But there should be chance given an easy entry into any country. Everywhere, the top retailer of the country is local retailer. There is no reason for us to give away our business and our customers so early in life. It should be made difficult and not so easy.

Contd.,

The other issue is that private equity and FII investments should be allowed.

In 2-3 year’s time, we should be competitive enough to take on international players.

A roadmap should be given by the government on the manner in which it plans to open up. If we are aware of the way things are going to happen, we are more than willing to compete.

Contd.,

As far as the role of the government is concerned, we are still coming under too many ministries like commerce; agriculture finance etc., there should be a single body to look at modern retaining in this country.

Foreign investments have two components – FII and FDI, in retailing, unfortunately, there has been an anomaly that, while FII investments are permitted in retail companies that are listed, and they are not allowed in primary market issues or in unlisted companies. There is no rationale for not permitting primary market investments when you are allowing secondary market deals to take place. So, in the whole process, you are only allowing the manipulators and the speculators in the market place to make money.

Contd.,

FDI is welcome in sectors like lifestyle goods, home sectors, fashion and electronics. But there should be chance given an easy entry into any country. Everywhere, the top retailer of the country is local retailer. There is no reason for us to give away our business and our customers so early in life. It should be made difficult and not so easy.

The other issue we agree on is that private equity and FII investments should be allowed. In 2-3 year’s time, we should be competitive enough to take on international players. A roadmap should be given by the government on the manner in which it plans to open up. If we are aware of the way things are going to happen, we are more than willing to compete.

Contd.,

As far as the role of the government is concerned, we are still coming under too many ministries like commerce; agriculture finance etc., there should be a single body to look at modern retaining in this country.

Foreign investments have two components – FII and FDI, in

retailing, unfortunately, there has been an anomaly that, while FII investments are permitted in retail companies that are listed, and they are not allowed in primary market issues or in unlisted companies.

There is no rationale for not permitting primary market investments when you are allowing secondary market deals to take place. So, in the whole process, you are only allowing the manipulators and the speculators in the market place to make money.

Contd.,

Indian retail industry has no dearth of retail experience, entrepreneurship, technology and the mindset of thinking big.

But there is lack of capital. In terms of retail formats, food and groceries is one segment

where some large Indian players have demonstrated that they can deliver value to the customer. They can bring in the concepts, which have been prevailing abroad and Indianise the model and even make it better.

Even with the capital constraints, a lot of progress has been made . Indian retailers are investing in infrastructure and technology. Each one of us is talking of investing Rs.10 crore in technology, despite constraints on profitability. If you give us access to cheap funds, other investments also in terms of cold chains or warehousing facilities will come up. Retailers need to be supported, encouraged and given access to cheaper capital.

Contd.,

if we allow foreign retailers to come in, there will be incremental growth. In fact, we need more brands in the lifestyle retail segment. So one must choose the categories carefully and, therefore, not open up completely. Another factor causing a lot of bullishness among the foreign players is the much talked about Global Retail Development Index (GRDI) of A.T.Kearney, where India is right on top.

Indian Consumers are showing a trend, which is different and you cannot stop it. Just take what is happening to consumer spending. Last year 3 million Indians traveled abroad spending $25,000. Then, look at the grey market, which is as big as the organized sector.

The questions here is can you stop the consumers from doing what he or she wants to do? But if consumers want Tommy Hilfiger, Marks& Spencer’s or Espirit, they will go out and buy it.. Secondly, the consumers are clearly saying I want this. The government is giving them access outside and are saying do not give them access inside. All the lifestyle sectors should be opened up to allow the consumers to make the choice.

Contd.,

In a country where banking, insurance and telecom have opened up, can a case be made that FDI in retail should not be allowed? What is so special about retail? Unless we are saying we cannot compete with the foreigners and, hence, they should not be allowed. The logic of profits being exorbitant is also not true.

The profit in the retail business with its single digit margin, is small. In sector after sector, we have seen that when competition intensifies, prices actually fall sharply. So, the clear logic is that, if you look at it from the consumer point of view, competition is going to result in cost reduction. As long as you are protected against unfair competition, there is no case for restricting FDI in retail. Retail is not a special industry or different from any other industry.

It is not fair to compare the retail industry with the telecom or banking sectors, simply because we are talking of only a 3 per cent organized retail. There is another 97 per cent it which is informal. So, any comprehensive opening up will have enormous social implications across the country, where 75 per cent of our population is staying in rural India. So, a phased and transparent policy would be welcomed by every one.

Contd.,

Infrastructure is one of the impediments that the government needs to address. Today, we have malls but no roads or public transport for people to access them. This is where government can invest and drive up consumption.

FDI can help us in many ways. Entry of foreign players can definitely improve the competitions here. It will also improve practices and processes. It can benefit the industry as a whole, but if it is allowed unrestricted it can create issues in the short term.

Issues for Discussion :

• Should a cap on investment be imposed? If so, what should this cap be?

• Should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing?

• Should we stipulate that at least 50% of the jobs in the retail outletsshould be reserved for the rural youth?

Contd.,

• Should we stipulate that a minimum percentage of manufacturedproducts be sourced from the SME sector in India?

• How best can small retailers be integrated into the upgraded valuechain?

• As a part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)?

• Should an exclusive legal and regulatory framework be established toprotect the interests of small retailers?

• Should there be a compulsion of minimum procurement from ruralmarket (farmers)?

POLICY SUGGESTIONS

Breathing spaceFDI in backend-retailStrengthening competition lawTransparent pricingRetailers skill enhancementsTraders cooperativesIntegrating unorganized sectorsSystemic changes in the rural sector