Foreign Direct Investment in Multi-brand Retail

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2011

AUTHOR: SURBHI PAREEK

CO-AUTHOR: KAUSTUBH PRAKASH

6/2/2011

RETAILING IN INDIA: RECENT TRENDS

AND UPCOMING CHALLENGES

-ASPECTS OF INDIAN ECONOMY


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Submission of paper

On

Challenges and Suggestions for FDI in Multi brand retailing in

India

By:

Surbhi Pareek & Kaustubh Prakash


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Contents

1.Introduction.

2.Present economic scenario.

3.A conflicting view

3.1 Expert Interpretation-Arguments in Against

3.2 3.2Expert Interpretations- Arguments in Favor.

4.Challenges and threats

4.1 Threats to Existing retailers..

4.2 Threats to Foreign investors.

4.3 Threats to Economy..

5.The crawling advantages

6.

Suggestions7.Conclusion..

8.Research methodology

9.References.


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Retailing in India: Recent trends and

Upcoming Challenges.

Introduction

A good investment climate is central to growth and

poverty reduction. A vibrant private sector create jobs,

provides the goods and the services needed to improve

the living standards, and contribute taxes necessary forpublic investment in health, education, and other

services. But too often governments stunt the size of

those contributions by creating unjustified risks, costs,

and barriers to competitions1

Francois Bourguignon, Senior Vice President and

Chief Economist, World Bank

1

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What is Foreign Direct Investment?

According to International Monetary Fund, FDI is defined as

Investment that is made to acquire a lasting interest in an enterprise

operating in an economy other than that of the investor. The

investors purpose being to have effective voice in the management

of the enterprise.2

What is Multi-Brand Retailing?

Definition of Retailing

It is defined as all activities involved in selling goods or services

directly to the final consumer for their personal, non-business

use via shops, market, door-to-door selling, and mail-order or

over the internet where the buyer intends to consume the

product.3

Multi brand retailing

The marketing of two or more similar and competing products, by the

same firm under different and unrelated brands. While these brands

eat into each others' sales (see cannibalism), multi-brand strategy doeshave some advantages as a means of (1) obtaining greater shelf space

and leaving little for competitors' products,

2International Monetary Fund, Bal ance of Payments Manual , Washi ngton, DC, 1977, pg.408

3www.icmis.net/infoms/icoqm10/ICOQM10CD/pdf/P412-Final.pdf
http://www.businessdictionary.com/definition/product.htmlhttp://www.businessdictionary.com/definition/brand.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/cannibalism.htmlhttp://www.investorwords.com/4775/strategy.htmlhttp://www.businessdictionary.com/definition/advantage.htmlhttp://www.businessdictionary.com/definition/mean.htmlhttp://www.businessdictionary.com/definition/competitor.htmlhttp://www.businessdictionary.com/definition/competitor.htmlhttp://www.businessdictionary.com/definition/mean.htmlhttp://www.businessdictionary.com/definition/advantage.htmlhttp://www.investorwords.com/4775/strategy.htmlhttp://www.businessdictionary.com/definition/cannibalism.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/brand.htmlhttp://www.businessdictionary.com/definition/product.html


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(2) Saturating a market by filling all price and quality gaps,

(3) Catering to brand-switchers users who like to experiment with

different brands, and

(4) Keeping the firm's managers on their toes by generating internal

competition.4

The retailing sector in India has undergone a significant transformation.

Traditionally, Indian retail sector has been characterized by the

presence of a large number of small unorganized retailers. However, in

the past decade there has been development of organized retailing,

which has encouraged large private sector players to invest in this

sector. With high GDP growth, increased consumerism and

liberalization, India has been portrayed as an attractive destination for

FDI in retailing. However, at present India currently allows 51% FDI in

single-brand retail and 100% in cash-and-carry stores that can only sell

to other retailers and businesses.

The objective of our study is to analyze the current retail scenario in

India, investigate the controversial views of the various stakeholders

and evaluate the likely challenges and threats of FDI in Multi-Brand

Retailing to organize and unorganized domestic retailers and the

countrys economy from entry of foreign players. The study also

suggests reform measures for removal of such barriers.

4http://www.busi nessdi ctionary.com/defini tion/multi-brand-strategy.html
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Present Economic scenario

FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand

Retailing was, however, permitted in 2006, to the extent of 51%. Sincethen, a total of 94 proposals have been received till May, 2010. Single

brand retail outlets with FDI generally pertain to high-end products and

cater to the needs of a brand conscious segment of the population,

mainly attracting a brand loyal clientele. This segment of customers is

distinctly different from one that is catered by the small retailers/

kirana shops.

FDI in cash and carry wholesale trading was first permitted, to the

extent of 100%, under the Government approval route, in 1997.

Between April, 2000 to March, 2010, FDI inflows of US $ 1.779 billion

(Rs. 7799 crore) were received in the sector. This comprised 1.54 % of

the total FDI inflows received during the period.

Trade is an important segment in India's Gross Domestic Product

(GDP).As per the National Accounts, released by the Central Statistical

Organization (CSO), GDP from trade (inclusive of wholesale and retail in

organized and unorganized sector), at current prices, increased from Rs

4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual

rate of 16.2 per cent. The share of trade in GDP, however, remained

fairly stable at little over 15 per cent in last four years", the share of the

private organized sector in total GDP from trade was 23.2 per cent in

2008-09 and it grew at 15.0% during the year. The share of the retail

trade in GDP remained stable at 8.1 per cent during this period. Though

the data on volume of turnover by retail is not separately maintained,


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commodity composition of private consumption expenditure provides

reasonable estimates of the size of the retail sector.5

As per the National accounts, private final consumption expenditure,

increased from Rs 19,26,858 crore in 2004-05 to Rs 32,26,826 crore in

2008-09, at an average rate of 13.8 per cent per annum-. However,

expenditure on some items like transport and communication;

expenditure on food in hotels and restaurants; expenditure on rent,

fuel and power; and expenditure on education and recreation are

distinct from trade. Private consumption expenditure adjusted for

items which could be considered a. close approximation to trade,

increased from Rs 11,92,405 crore in 2004-05 to Rs 19,93,380 crore in

2008-09, at an average rate of 13.7 per cent3.Rate of growth of GDP at

current market prices during this period at 14.5 per cent, was higher

than this growth.6

When seen at constant 2004-05 prices, however, private final

consumption expenditure increased from Rs 19,26,858 crore in 2004-05

to Rs 26,51,786 crore at an average rate of 8.3 per annum.

Private consumption expenditure adjusted for items like transport and

communication etc, increased from Rs 11,92,045 crore in 2004-05 to Rs

16,67,286 crore in 2008-09, at an average rate of 8.8 per cent. Rate of

growth of GDP at constant market prices during this period at 8.4 per

cent was lower than the growth of private consumption expenditure

that could be attributed to trade.

5dipp.nic.in/...paper/DP_FDI_Multi-BrandRetailTrading_06July2010...

6http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi -BrandRetai lTrading_06July2010.pdf
http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdfhttp://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdfhttp://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf


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INDIA: A GOLDEN OPPORTUNITY!!!

Distinction of Indian Retail

The Indian trading sector, as it has developed over centuries, is very

different from that of the developed countries. In the developed

countries, products and services normally reach consumers from the

manufacturer/producers through two different channels: (a) via

independent retailers (vertical separation) and (b) directly from the

producer (vertical integration). In India, however, the above two

modes of operation are not very common. Small and medium

enterprises dominate the Indian retail scene. The trading sector is

highly fragmented, with a large number of intermediaries. So also,

wholesale trade in India is marked by the presence of thousands of

small commission agents, stockiest and distributors who operate at a

strictly local level.

Retail giants like US-based Wal-Mart and French Carrefour are verykeen to enter in the segment. Bharti Enterprises and Wal-Mart Stores

entered into a joint venture in August 2007 and started cash-and-carry

stores named 'Best Price Modern Wholesale' in 2009.7

Retailers like Bharti-Wal-Mart have been lobbying hard to get the FDI

for Multi brand retailing which it is being barred from and have only

B2B stores set-up in India on the outskirts of Chandigarh, Others like

Tesco and Carrefour have been trying hard to get into the Indianmarket which is being seen as a potential gold mine and research

agencies have already rated Indian Retail market to be very lucrative

taking into consideration the huge population and untapped retail

7http://rupe-india.org/43/retail.html
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industry which is at a very nascent stage compared to the potential of

retail biggies like Wal-mart, Tesco and Carrefour.8

A CONFLICTING VIEW

Why is the government so keen in inviting FDI in the retail sector??

(i) Only a few global firms possess proprietary expertise in retail trade.

They would not transfer their expertise to local firms unless they were

allowed to operate in the domestic market.

Reality: In the literature on retail, we could not trace the existence of

any cutting edge proprietary expertise either technical or managerial.

(ii) The government needs FDI to meet its foreign exchange

requirements.

Reality: Because of large capital inflows, the Government of India is

today burdened with huge and growing foreign exchange reserves. By

April 13, 2007, the foreign exchange reserves had swollen to $203

billion. The argument for FDI in retail to attract foreign exchange is not

tenable.

(iii) Only global retailers can satisfy the rising and varied demands of

Indian consumers.

Reality: It has yet to be shown which product or service is being offered

by foreign retail firms is unavailable at present to Indian consumers, or

cannot be provided without FDI. Moreover, the alleged benefits of

consumer choice are being inflated. Indeed, the availability of

8http://www.thehindu.com/business/Economy/article2147376.ece
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excessively wide choice makes it so complex and time-consuming for

the consumer to decide that it leads to stronger loyalty to particular

brands! Research reveals that an average grocery store in USA, offers

35,000 to 40,000 stock keeping units versus 12,000 to 15,000 thirtyyears ago. The suppliers offer about 20,000 new items each year; of

which 1,000 are new efforts and the rest are line extensions. However,

the top 5,000 items still account for about 90 percent of sales, as they

did thirty years ago

Rather than internal pull, the reason that the Government is

interested in pushing FDI in retail trade is external pressure.9

Expert Interpretation-Arguments in Against

The current national retailers in India have different view points on the

proposal of FDI in India, Retail King of India Mr.Kishore Biyani of

Future Group feels that the current situation in the Indian Retail is at a

very nascent stage and any introduction of FDI will harm the interest of

the National Retailers and believes there are enough investors in India

and have been successful citing his own example wherein his home

furnishing business investors have received 3x the amount invested.

A discussion paper, prepared by the Department of Industrial Policy

and Promotion for eliciting public opinion, has made out a strong case

for the entry of multinational multi-brand retailers into the country.

The paper, released for public comments on Tuesday, has favored

allowing 51 per cent Foreign Direct Investment (FDI) in the multi-brand

retail sector which would allow the global giants to directly set up in the

country.

9http://rupe-india.org/43/retail.html


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Further, it argued that FDI in multi-brand retailing would also assist in

lowering consumer prices and inflation. At present, the government

policy allows 51 per cent FDI only in the single-brand retailing. The

extension of this to the multi-brand segment would mean that theglobal multi-brand retailers would be able to open their shops in the

country to directly sell consumer products ranging from state-of-the-art

entertainment electronic.

Both industry and the stock market welcomed the baby step towards

opening up the sector. The retail industry in India needs access to

more capital. It can definitely go into the investment (for) the supply

chain. But we just cannot build the back-end without an equal amount

of development in the front-end, saidRakesh Biyani, CEO of

Future Group.

Expert Interpretation-Arguments in Favor

Thomas Varghese, CEO of Aditya Birla Retail Ltd, said he is in

favour of allowing 49% FDI in multi-brand retail. If you are allowing

FDI, do it in a calibrated fashion because it is politically sensitive and

link it (with) up some caveat from creating some back-end

infrastructure, he added

Whereas retailers like Shoppers Stop and Reliance Retailfeel with the

induction of FDI they can grow at a much more faster rate than nowand can cover most of the Tier 2 and Tier 3 towns of India and share the

joy and savings with them too and expertise of Wal-Mart and other

Multinational retailers can help in building infrastructure which has

been a point of concern for all the National retailers as there are no


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Threats to current retailers

Retail in India has tremendous growth potential, Retail is already the

second largest employerin India and any changes by bringing major

foreign retailers who will be directly procuring from the main supplier

will not only create unemploymenton the front end retail but also the

middleman who have been working in this industry and the chain will

impact the governments growth and employment problems in a long

term.

It would lead to unfair competition and ultimately result in large-scale

exit of domestic retailers, especially the small family managed outlets,leading to large scale displacement of employed in retail sector.

Further, as the manufacturing sector has not been growing fast enough,

the persons displaced from the retail sector would not be absorbed

there.

The Indian retail sector, particularly organized retail, is still under-

developedand in a nascent stage and that, therefore the companiesmay not be able to survive in the ex-parte competition and may give

up in front of global giants.

If the existing firms collaborate with the global biggies they might

have to give up at the global front by losing their self competitive

strength.

Earlier this year, the Prime Minister had sought a debate on

opening up the sector. There has been an overwhelmingapprehension among political parties of different hues that the entry

of foreign direct investment in retail business would signal the end of

the conventional small mom and pop(kirana) stores as they would

be swamped by the multi-national corporations.


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Threats to the foreign Investors

Before investment approval is given, the application of foreign

investors has to pass through various transfer channels which are

dominated by theBureaucrat. This is referred to as Red Tapism. This

results into delay in decision making regarding investment beginning.

Delay in approvals leads to disinterested corporate giants.

Corruption is another major concern. India has a number of anti-

corruption cells and anti-corruption acts, but some foreign firms

have identified corruption as one of the major obstacles to FDI in

India. India has requirement for the number of permits and significantly

longer median number of days to start a firm than almost all

countries, which are included in the Global Competitiveness

Reports Database. According to the report by World Bank, starting

a business in India requires 11 procedures and median time is 71

days as compared to china, which has 14 procedures with a median

time of 48 days.


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More of an opportunity, less of a threat!!!

THE CRAWLING ADVANTAGES

Analysis of FDI flows in trade indicates that, over the 1990s, developed

countries faced market saturation and became relatively less attractive

to foreign investors. Instead, developing countries and Central and East

European countries became increasingly attractive to foreign investors.

Adoption of liberalized policy for the Multi-brand retail sector would be

more of a positive step as it would bring added advantage of the

following:

foreign Direct Investment (FDI) is one of the major sources of

investments for a developing country like India wherein it expects

investments from Multinational companies to improve thecountries growth rate, create jobs, share their expertise, and

research and development in the host country

With the growth of organized retailing, the average size of shops is

increasing; both in terms of turnover and employment, and the

density of retail outlet is declining. Moreover many retailers have

entered into joint ventures, strategic alliances and co-operation

agreements. This in turn result into growth of economy and adding

to it will give opportunities to young Human Resource of the

nation to exploit the resources in the prevalent competitive

environment.


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FDI can be a powerful catalyst to spur competition in industries

characterized by low competition and poor productivity. Examples

include the cases of consumer electronics in Brazil and India, food

retail in Mexico, and auto in China, India, and Brazil. FDI can be a powerful catalyst to spur competition in the retail

industry, due to the current scenario of low competition and poor

productivity. It can bring about:

o Supply Chain Improvement

o Investment in Technology

o Manpower and Skill development

o

Tourism Developmento Greater Sourcing From India

o Progression in Agriculture

o Benefits to government: through greater GDP, tax income

and employment generation.

The retail sector is severely constrained by limited availability of

bank finance. The Government and the RBI need to evolve suitable

policies to enable retailers in the organized and unorganized sector

to expand and improve efficiencies.


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Wholesale and retail projects forms part of the Catalogue for

Encouraged Foreign Investment Industries. Retail trade in China

has been growing since 1992. Employment in the retail and

wholesale trade increased from about 4% of the total labor forcein 1992 to about 7% in 2001.The number of traditional retailers

also increased by around 30% between 1996 & 2001.12

Entry of foreign players must be gradual with social safeguards so

that the effects of labor dislocation can be analyzed and policy fine

tuned. Foreign players should initially be allowed only in metros.

Present scenario says it has no or little harm in getting FDI but it

should be done in a phased manner with a beginning of 10% andlater to 26% and 51% looking at the situation to pump more

money in the Indian Retail sector which is also said to be having

cash crunch and many other clauses of procuring, staff

recruitment, investments in warehouse, cold storage,

infrastructure, competition and retail formats so that not only

does the money comes in but also it's a win-win situation for the

current national retailer as well as mom and pop stores who

account for 70% of the retail business even after the arrival of

national retailers from the corporate giants like the Tata, Reliance,

Future Group and the Birla's.13

The sector should be opened up to foreign firms in a calibrated

manner.

India currently lets around Rs1 trillion of fresh produce go waste

and more than half of this can be brought to market if the proper

farm-to-fork infrastructure is in place. The department has argued

12http://zeenews.india.com/busi ness/Special /Organised_or_Unorganised_Retail _Final.pdf

13http://www.articlesbase.com/strategic-planni ng-articles/fdi-in-multi-brand-retailing-in-india-3406940.html
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that FDI in front-end retailing is imperative to fund cold storage

for farm produce

Half the jobs created by new retail chains should be reserved for

rural youth. The unfounded fear that large retailer will kill small ones is wrong.

There is room for both to grow over the next foreseeable future,

said Harsh Bahadur, general manager (wholesale) at Tesco

Hindustan Wholesaling Pvt. Ltd. He added that if the government

went ahead and allowed FDI, it would be good news for the

economy.14

The Government is proposing some safeguards to ensure that non-

serious players and fly-by-night operators are not entertained. To

this end, any player who seeks entry into the Indian market will be

required to invest a minimum of Rs. 500 crore. The Government is

also seeking certain other investment commitments, including

establishing backend cold chain outlets.

The structure of retail sector reflects its socio-demographic

characteristic. Therefore being reluctant to opening up for

development process would only lead to more critical relations

with the foreign nations.

India has been making a tremendous progress in economic front

since 1991, but the economy is still hobbled by excessive rules and

regulations and with the powerful bureaucracy as the rule making

body. Thus the government should formulate single Window

Systems in order to reduce complexities on the part of the fore ign

investors as well as the bureaucratic structure.

14http://www.livemint.com/2010/07/06233436/India -mulls -FDI-in-multi-brand.html
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CONCLUSION

It is widely believed that foreign investment is a key component in the

growth process of any developing country. But it is not the only factorthat could help for the sustained growth. It must be supported by well-

planned micro and macroeconomic policies. These policies taken

together create a viable investment climate. The foreign direct

investment and politically sensitive multi brand retail have been facing

a lot of trouble being united and worked upon. The challenge lies in the

2 side issue-debate with multi brand industrialist and domestic

retailers. While the former believe that industrial lobby group

representing foreign companies and industries are seeking towards

investment, the latter fear for their future. Concluding the research

paper, we would propose that the investment may lead to an

interruption in the smooth flow of the economy and would lead to

external dominance.


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Foreign Direct Investment in Multi-brand Retail

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