FDI in Retail Sector

India has rapidly risen to become a major force in the global economy and is currently the most attractive retail market in the world. The boom in the Indian retail sector did not go unnoticed; and the untapped sector is now being forayed by various retail giants from all over the world.

The retail sector of India is one of the largest sectors, which accounts for over 10 per cent of the country’s GDP and around eight per cent of the employment. It has emerged as a dynamic and fast growing sector with international players eager to enter the market.  The contemporary retail sector in India is reflected in sprawling shopping centers, multiplex- malls that offer shopping, entertainment and food all under one roof besides the unorganized individual retails. With significant growth of the economy of the country, the concept of retail market is now changing in terms of format and consumer buying behavior.

Indian retail market is being looked as one of the most profitable sectors. India was ranked as the most attractive and the World’s No 1 country for FDI in the AT Kearney’s Global Retail Index 2006, for two consecutive years. This is because presently, in India there is low share of organized retailing, only 4% of the entire retail sector. Thus the absence of an organized retail sector provides a golden opportunity to the foreign firms to establish their organized retail shops in India. A report by investment banker Goldman Sachs, credits India with the potential to deliver the fastest growth over the next 50 years with an average rate of more that five percent a year for the entire period.

The organized retail sector is expected to grow stronger than GDP growth in the next five years. At current growth rate it will be the world's fifth-biggest consumer market by 2025. The Associated Chambers of Commerce and Industry of India, has also expressed its view in favour of further opening up of retail for foreign direct investment in a calibrated manner. According to industry estimates, the organized and unorganized retail market will grow to USD 637 billion by 2015. The sector is growing at around 40% a year, says the data showcased by the India Retail Report 2007.

The above factors have thus motivated the retail giants from overseas to enter the Indian market despite all the hurdles. Recently, Wal-Mart and Bharti Enterprises finally signed a fifty-fifty joint venture agreement for cash and carry business that had been awaiting the government’s nod for a long time. With the venture called Bharti Wal-Mart Private Limited, Wal-Mart has announced a foray in India, The joint venture is soon to come up with its first store, which will sell groceries, consumer appliances, fruits and vegetables to retailers and small businesses, by 2008-end. US-based property fund Walton Street Capital is also eager to make investments in Indian retail sector. Plaza Centres, a subsidiary of Elbit Medical Imaging, an Israeli company, announced to invest a large sum of $1.24 billion to set up 50 shopping malls in India. Carrefour, the world’s second-largest retailer also, decided to revisit India. It is finally setting up a wholesale business in India, as a joint venture with an Indian local retailer business. The operation is likely to start by the end of 2009.

Marks and Spencer, the largest clothing retailer in UK, is also planning to set up 51: 49 joint venture in India in all kinds of food and home furnishing articles. France’s LVMH, the world’s largest retailer of luxury goods, Lladro Commercial of Spain, the world’s leading retailer of porcelain figures and Chanel SA, the French perfume and accessories’ company are also preparing to start their joint ventures in India. Starbucks coffee will be entering India via a partnership with New Horizons Retail Pvt. Ltd, a newly formed Indian company. Starbucks will form a JV via its Singapore based division, Starbuck Investor and initially hold only 18% stake in the company with an investment of $1.12 million, with an option to increase its state to 51% at a later time. Metro Cash & Carry India, the domestic arm of global German wholesale major is also planning to further expand its business by opening more cash & carry centers in Mumbai, Punjab and Kolkata. Presently it has two centers in Banglore and Hyderabad. 

FDI IN SECTOR SPECIFIC RETAIL

Of late the Commerce & Industry Minister has indicated the Government’s interest in opening up the retail trading for select sectors such as electronic goods, stationery, sports goods, and building equipment. Thus, the Government is now considering allowing FDI in sector-specific retail trade. However, as in the case of single brand retail, all FDI proposals for sector-specific retail too would need the approval from the Foreign Investment Promotion Board (FIPB) and would be taken up on a case-by-case basis.

FDI IN CASH AND CARRY BUSINESS

Presently, India allows 100 per cent FDI in cash-and-carry and wholesale operations through automatic route. This does not require prior approval of the government or of (FIPB) Foreign Investment Promotion Board. Investors are only required to notify the concerned Regional office of RBI within 30 days of receipt of inward remittances and file required documents with that office within 30 days of issue of shares to foreign investors. The government through the Press Note 3 in 2006 permitted 51 per cent FDI in single-brand retail which is under the Government approval route. To qualify as a single brand retailer, the branding must be at the time of manufacturing and not distribution and, secondly, it must be a brand that is retailed abroad.

FRANCHISE RETAIL IN INDIA

The franchise model has worked well for years for several international brands. The franchise route is the retail option of choice for most brands across product segments - and this holds true especially for apparel and footwear brands. Retail franchises include Marks & Spencer, West Side, Evita Peroni, Pepe Jeans and Adams, running successfully. US-based sports footwear and apparel giant, Nike is planning to expand its retail presence in the country. The company is looking at doubling its retail stores through the franchisee route by the end of this year.

According to C Y Pal, president of the Franchising Association of India, in India, only 2% of retailing was through franchising in 2005. This segment has been growing at a very fast pace of 30% to 40%, over the last four to five years. However, a liberal FDI policy in India, are now encouraging joint ventures and thus some global brand retailers are planning to convert their franchise contracts in India into joint ventures. However, retail giants like Carrefour are planning to take a franchise route to enter India.

FOOD RETAIL IN INDIA

The fastest-growing retail segments are food and grocery, followed by clothing, furniture and fixtures. Food products and groceries make up about 55 per cent of the entire retail market, which has been growing at a CAGR of 10 per cent over the last five years, according to India Brand Equity Foundation. The organized retail food and grocery sector constitutes the largest opportunity for growth and account for it is only 2% of total sales at present. According to a McKinsey report, the share of an Indian household's spending on food is one of the highest in the world at around 48% of income. Food being a major driver of retail consumption globally has also seen growth and entry of various global fast food chains into India like Dominos, Pizza Hut and Mc Donald’s. Presently, the retail giants like Bharti-Wal-Mart and Carrefour are focusing on the food & beverages segment rather than non-food segments in India. An internal study of Wal-Mart Team revealed that that Carrefour Approach of focusing on food would be better suited for Indian market, unlike the international Wal-Mart format.

CHANGING GOVERNMENTAL POLICIES

The Union Minister of Commerce and Industry, Kamal Nath has assured that it would not be too long when the untapped retail sector in India, worth $330 billion would open for FDI. The Minister also said that the Government wants to encourage foreign investment in back-end of retail activities such as logistics management, cold chain and technology. New chief of Confederation of Indian Industry (CII), Sunil Mittal is also working in support of FDI in organized retail market. The McKinsey report states that FDI will help the retail businesses to grow to $460-470 billion by 2010-making it one of the five largest in the world. Hence, a bright future for the Indian retail organized sector is not far off. The government’s gradually changing policies for loosening the FDI will be a boon for the international retail giants eyeing India.