FDI in Retail Sector : Pros & Cons

December 6, 2011

India Retail The Story So Far & The India retail market is estimated at US$ 470 Bn in 2011, accounting for ~35% of GDP and is Growth Outlook @ CAGR of 7.5% expected to grow to US$ 675 Bn by 2016,
The organized retail market is estimated at US$ 26 Bn and accounts for ~6% of the overall retail market for 2011. The organized retail market is projected to grow to US$ 84 Bn by 2016, @CAGR of 26% The retail market in India offers significant opportunities for retailers & brands Organized Retail Penetration Level USA France Japan Malaysia Brazil Russia China India 85% 80% 66% 55% 36% 33% 20% 5% across categories.

Sources : The Retailers, Ernest & Young, Jan 2009 ; Working Paper no. 222, ICRIER & Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

India Retail Market

The retail market in India is estimated at US$ 470 Bn in 2011 and is projected to grow to US$ 675 Bn by 2016, CAGR of 7.5% for the period 2011-16

Overall Retail Market US$ Bn 675 470 310

2006

2011

2016

Source: Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

India Retail Market

The retail market in India is estimated at US$ 470 Bn in 2011 and is projected to grow to US$ 675 Bn by 2016, CAGR of 7.5% for the period 2011-16 Organized Retail Market US$ Bn In $ US bn

6:0% R: 2 CAG
21:0% CAGR:

84

26 10

2006

2011

2016

Source: Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

Food and Grocery market in India is estimated at US$ 325 Bn in 2011 (69% of the overall retail and is expected to grow to US$ 425 Bn by 2016 (63% of the overall retail ), @ CAGR of 5.5% The organized Food and Grocery retail market in India is estimated at US$ 9 Bn in 2011 and is expected to grow to US$ 34 Bn by 2016, @ CAGR of 30% Organized Retail Market
In $ US bn
425 325 217

Category : Food and Grocery

34 2 2006 Total Market 9 2011 Organized Market 2016

Source: Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

India Retail Market (Overall) : By Category

The total retail market in India is estimates at US$ 470 Bn in 2011. The Food & grocery segment is the largest retail category and accounts for ~70% of the total retail market. Category
Food and Grocery Apparel Jewellery & Watches Consumer Electronics & IT Pharmacy Furnishings & Furniture Restaurants and Food Joints Footwear Beauty Services Health/Fitness Services Others Total (US$ Bn)

2006
217 25 16.5 16.5 8 6.5 4.6 3.6 0.6 0.4 11 310

2011
325 35 25.6 22.7 13.9 9.1 8.8 4.5 1.3 1 23 470

2016
425 50.2 44.2 42.8 23.4 17.1 15.8 8.3 3 2.5 42.5 675

CAGR (201116)
5.50% 7.50% 11.50% 13.50% 11.00% 13.50% 12.50% 13.00% 18.00% 20.00% 13.10% 7.50%

Source: Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

India Retail Market (Organized) : By Category of organized retail . Food At 35%, Food & Grocery has the highest share
& Grocery along with Apparel, Jewellery & Watches and Consumer Electronics & IT accounts Category 2016 CAGR for ~80% of the organized2006 market in India in 2011. (2011retail 2011
Food and Grocery Apparel Jewellery & Watches Consumer Electronics & IT Pharmacy Furnishings & Furniture Food and Beverage (Eating Out) Footwear Beauty Services Health/Fitness Services Total (US$ Bn) 2 3.5 1 1.5 0.2 0.4 0.5 1 0.2 0.1 10 9 5.5 2.5 4 0.8 0.7 1.5 1.7 0.2 0.2 26 34 8 7.5 18 4.5 1.2 6 3.8 0.5 0.6 84 16) 30.00% 25.00% 35.00% 41.00% 12.00% 30.00% 17.50% 20.00% 25.00% 26.00% 8.50%

Source: Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011

India Retail The Story So Far & Growth Outlook malls, collectively measuring 0.2 million In 1999, India had 3 shopping
sqft. By the end of 2010, expected mall space is ~50 million sqft.

Sources :On .Point : JLLM

India Retail Key Growth Driver

Economic Growth : The per capita Income in 2009-10 more than doubled to US$ 849 from US$ 348 in 2000-01 Expanding Middle Class : By 2030, 91 million households will be middle class up from 21 million today Rapid Urbanization : 570 million people will live in cities, nearly twice the population of United States today Investment in Infrastructure : India expected to invest US$ 500 billion in infrastructure, mainly in power, telecommunication, road, railways and oil pipelines by March 2012 Rising Brand Consciousness : 60% of the population is below the age of 30 have exposure to Western consumption

Sources :On .Point : JLLM, McKinseys Indias Urban Awakening, 2010

FDI in Retail - Present Scenario

FDI in Single Brand Retail was permitted in 2006, to the extent of 51% and now opened to 100% . FDI in Multi Brand Retail is now opened up to 51%, with the following conditions: 1)Minimum investment of US$ 100 million 2)50% of US$ 100 million to be invested in the back-end infrastructure 3)30% of sourcing to be done from small scale industries 4)Stores can be opened only in cities with a minimum population of 1 million 5)States will have the freedom to decide entry of international retailer with 51% FDI FDI in Cash & Carry whole sale retailing was permitted, to the extent of 100% ,under the Government approval route, in 1997.
Sources :Discussion Paper on FDI in retail by DIPP

Rationale for FDI in Retail

A. Competition : Catalysts to spur competition & innovation in retail industry. Ensure highly efficient-low margin business model. B Consumers Improved product availability, quality & reduce wastages. Consumers to get best products and services at reasonable price. C. Back End & Supply Chain Improvement : Inadequate storage facilities cause heavy losses to farmers. 25%-30% of F&V and 5%-7% of food grain in India are wasted. An 11th plan working group has estimated a total investment of Rs 64312 crore in agriculture infrastructures. FDI in retail to bring investment, technology, management know how etc. Food inflation and fluctuation in food prices can be controlled.
Sources :Discussion Paper on FDI in retail by DIPP

Rationale for FDI in Retail

D. Better Realization for Farmers : Today, Intermediaries dominate the value chain. Indian farmers realize only 1/3rd of the total price paid by the final consumer against 2/3rd by farmers in nations with a higher share of organized retail. FDI to ensure better realization for farmers & producers. F. Economic Growth : Sourcing from India will increase. Exports to get significant boost. India can also become a shopping destination for the world. Expansion of stores and operations lead to employment generation . Sectors like Textile and handicraft will get a significant boost.

Sources :Discussion Paper on FDI in retail by DIPP

Rationale against FDI in Retail

Retail industry in India is the second largest employer after agriculture. Any game changing situation can lead to heavy job losses particularly in rural areas and small cities. Unfair competition and abilities of big retailers to sustain losses can lead to large scale exit of domestic retailers, especially the small family managed outlets. Indian retail sector including organized sector is still underdeveloped and in a nascent stage. It is critical that the retail sector is allowed to grow and consolidate first, before opening to foreign investors.

FDI in Retail Conclusion

Most of the consumers in India, particularly in urban areas, are exposed to benefits and experience of organized retail. It will be difficult to deny the same benefits and experience to balance consumers for a very long period. India is a big and growing market. Both unorganized and organized sectors can sustain together. Policy makers to ensure a level playing field for small retailers. Better credit availability to unorganized retailers from banks and micro-finance institution through innovative banking. Gradual opening of retail sector to give domestic industry enough time to adjust to the changes. Clear guidelines on investment in Infrastructure and Export commitments for International Retailers would help all stakeholders to benefit. FDI in Retail is not the only solution for growth of Retail in India.

Other steps that are necessary are as follows: 1.Review of all Agriculture production, storage, distribution and pricing laws including APMC Act 2.Introduction of GST and removal of OCTROI, Entry Tax, Service Tax on Rent, Excise Duty on Apparels 3. Investments in Infrastructure, especially Transportation, Cold Storage, Roads for efficient movement of goods 4.Building consensus on Economic benefits of FDI across all the stakeholders consumers, traders, farmers as this can also impact the social structure of the country

Thanks a lot..