Indian retail

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Foreign Direct Investment in Retail February 23, 2004

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Transcript of Indian retail

Page 1: Indian retail

Foreign Direct Investment in Retail

February 23, 2004

Page 2: Indian retail

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AgendaRetailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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AgendaRetailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

Page 4: Indian retail

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Retailing World’s largest private industry

US$ 6.6 trillion sales annually

Indian retailing Largest employer after agriculture -

8%* of population Highest outlet density in world

Around 12 mn outlets Still evolving as an industry

Long way to go

An overview

Retailing: An overview

*www.etretailbiz.com/dec2002

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Wal-Mart Topmost global Fortune 500

company(3 Consecutive Years) Annual Sales of over US$ 250 bn India’s two largest retail player

turnover around US$ 158 mn (Bata) and US$ 102 mn (Shoppers Stop)

Fortune 100 9 Retailers Carrefour, Ahold, Home Depot,

Kroger, Metro, Kmart-Sears, Target, Albertsons’

An overview

Retailing: An overview

*Fortune List of world’s top companies**Euromonitor India Retail Survey

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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Weekly MarketsVillage FairsMelas

Convenience StoresMom and Pop/Kiranas

PDS OutletsKhadi StoresCooperatives

Exclusive Brand OutletsHyper/Super MarketsDepartment StoresShopping Malls

Traditional/Pervasive Reach

Government Supported

Historic/Rural Reach

Modern Formats/ International

Evolution of Indian retail

Source of Entertainmen

t

Neighborhood Stores/Convenie

nce

Availability/ Low Costs / Distribution

Shopping Experience/Efficie

ncy

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Informal retailing Sector Typically small retailers. Evasion of taxes

Difficulty in enforcing tax collection mechanisms

No monitoring of labor laws

Formal Retailing Sector Typically large retailers Greater enforcement of taxation

mechanisms High level of labor usage monitoring

Indian retail

Evolution of Indian retail

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Corporate Houses Tatas: Tata Trent RPG group: Food World, Health and Glow, etc ITC: Wills Life Style Rahejas(ShoppersStop), Hiranandani(Haiko), DLF(DT cinemas) etc.

Dedicated brand outlets Nike, Reebok, Zodiac etc

Multi-brand outlets Vijay Sales, Viveks etc

Manufacturers/ Exporters Pantaloons, Bata, Weekender

Indian retail

Categories of Indian retail

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Modern Format retailers Supermarkets

(Foodworld) Hypermarkets (Big

Bazaar) Department Stores (S Stop) Specialty Chains (Ikea) Company Owned Company Operated

Traditional Format Retailers Kiranas: Traditional Mom and Pop

Stores Kiosks Street Markets Exclusive /Multiple Brand Outlets

Indian retail

Classifying Indian retail

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Hypermarket Big Bazaar Giants Shoprite Star

Department store Lifestyle Pantaloons Piramyds Shoppers Stop Trent

Entertainment Fame Adlabs Fun Republic Inox PVR

Indian retailers

Large Indian retailers

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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Greater per capita income Increase in disposable income of

middle class households 20.9%* growth in real disposable

income in ’99-’03. Growing high and middle income

population Growing at a pace of over 10%* per

annum over last decade Affordability growth

Falling interest rates Easier consumer credit Greater variety and quality at all

price points

Indian consumer

The changing Indian consumer

†From Euromonitor Retail Survey

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The urban consumer Getting exposed to international

lifestyles Inclined to acquiring asset More discerning and demanding

than ever

No longer need-based shopping Shopping is a family experience

Changing Mindset Increasing tendency to spend Post Liberalization children coming

of age100 mn 17-21 year olds*. Tend to spend freely.

Greater levels of education

Indian consumer

The changing Indian consumer

*Data from NCAER

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Market size Current market size is roughly US$

286 bn* 96% of the 12 Million stores are less

than 500 Sq. ft. Forecast Growth rate for the retailing

industry is roughly 8.3% for 2003-2008

Sales from large format stores would rise by 24-49%**

Formal and modern format retailing would enjoy rapid growth

Anticipated growth

Anticipated growth

*From ICICI Retail Report

**From Euromonitor Retail Survey

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Low domestic competition Because of fragmented nature of

industry

Lack of exposure to global best practices

Low entry barriers for unorganized retailing

Moderate entry barriers for organized retailing

Wholesale system under-invested leading to 20-40% wastage

Non level playing field issues Wide differences in treatment of

small and large retailers

Industry dynamics

Industry dynamics

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Highly distorted real estate market Pro-tenant laws Zoning laws

Zoning laws also vary from state to state

Non-availability of government land, and fragmented private holdings makes it difficult for retailers to acquire land

Government is largest property owner in countryUrban Land Ceiling act is archaic

Stamp Duty and registration charges at high levels. Also vary from state to state

RE issues

Real estate issues

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Growth determining factors Government Policy Infrastructure development GDP growth Employment generation and job

creationIn several new sunrise industriesImplies greater purchasing power

Growth factors

Growth factors

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India ranked 5th in the Global A.T Kearney Retail Development Index

Second only to China in Asia Least saturated of all global

markets studied The least competitive of all global

markets studied Implies lower barriers of entry for global players Considering tremendous market size, excellent potential for foreign players

India ranked 3rd in the Global A T Kearney FDI Confidence Index in 2004

Improved from Rank 6 in Year 2003

Advantage India

The Indian advantage

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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Current Indian FDI Regime FDI not permitted in retail trade

sector, except in: Private labels Hi-Tech items / items requiring specialized after sales service Medical and diagnostic items Items sourced from the Indian small sector (manufactured with technology provided by the foreign collaborator) For 2 year test marketing (simultaneous commencement of investment in manufacturing facility required)

FDI in Retail not

permitted

FDI in Indian retailing

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Metro Group of Germany Cash-and-carry wholesale trading Proposal faced strong opposition

Entities established prior to 1997 Allowed to continue with their

existing foreign equity components. No FDI restrictions in the retail

sector pre-1997 Foodworld

51:49 JV between RPG and Dairy Farm International, Leading food retailer in India now

Mc Donalds

Current FDI

FDI in Indian retailing

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Franchise International company gives name

and technology to local partner. Gets royalty in return

In case master franchise is appointed for region or country, he has right to appoint local franchisees

Nike, Pizza Hut, Tommy Hilfiger, Marks and Spencer, Mango

Manufacturing Company sets up Indian arm for

production Bata India. It also has right to retail in India

How they are present

International retailers in India: Strategies

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Distribution International company sets up local

distribution office Supply products to Indian retailers

to sell Also set up franchised outlets for

brandSwarovski, Hugo Boss

Wholesale trading Cash and Carry operations 100% FDI permitted

Metro Cash n Carry

How they are present

International retailers in India: Strategies

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Agenda

Retailing : An overview

Indian retail

FDI in Indian retailing

Why FDI ?

How FDI ?

Incentives for FDI

Case study : Chinese retail

Recommendations

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Improve competition Develop the market Greater level of exports due to

increased sourcing by major players Sourcing by Wal-Mart from China

improved multifold after FDI permitted in China

Similar increase in sourcing observed for Metro in India

Provides access to global markets for Indian producers

Benefits of FDI

Why FDI?

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Investment in technology Cold storage chains solve the perennial

problem of wastage Greater investment in the food

processing sector technology Better operations in production cycle and

distribution Better lifestyle

Greater level of wages paid by international players usually

More product variety Newer product categories Economies of scale to help lower

consumer price Increased purchasing capacity of

consumers

Benefits of FDI

Why FDI?

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Manpower and skill development Through retail training and Greater managerial talent inflow from

other countries Tourism Development

A strong retailing sector boosts tourism as seen from the experience of Singapore and Dubai

Investment in whole supply chain Improved product basket from India for

exports Long term benefits

Up-gradation of agriculture Development of efficient small and

medium size industries

Benefits of FDI

Why FDI?

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Benefits to the government

Greater Per Capita Income

Greater ConsumerSpending due to

economic boom

Increasing Tax Paying Population

Greater Sourcing

From India

Reduced TaxEvasion

GDP Growth

Increased Tax Revenues

Greater Exports

Employment

Benefits to Govt.

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Increase employment levels FDI would result in market growth

and expansion Employment generated at various

levels Increased consumer demand implies employment generation across the value chain

Does not need very high skill sets Needs high school graduates and other similar skill levels Currently this is a majorly unemployed demographic group

Boom in employment Similar to job generation in ITES industry On a much larger scale But new jobs comparatively lower down the value chain

Benefits to govt.

Benefits to the government

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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FDI should be allowed in stages Initial stages: 26% FDI

Establishment Phase: 49% FDI

Mature Phase: 100% FDI

FDI policy No incentives needed to attract FDI Market size and potential are

sufficient inducers No need for costly tax breaks, import

duty exemptions, land and power subsidies, and other enticements

How FDI ?

How FDI ?

2 yrs

2 yrs

2 yrs

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why and why not FDI ?

How FDI ?

Case study : Chinese retailing

Recommendations

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FDI permitted in 1992. 40 foreign retailers have secured approval

Retail sales have [email protected]% CAGR since FDI was permitted

FDI initially restricted to 6 major cities (including Beijing, Shanghai and Guangzhou) and SEZs

Foreign ownership initially restricted to 49%

US$ 22 bn of FDI attracted, 3.6% of total FDI

In 2003, FDI in wholesale and retail was US$ 1.1 bn (Around 30% of our total FDI in 2003)

Current restrictions on FDI will be phased out over 5 years as condition of WTO entry

Chinese retailing

Case study : Chinese retailing

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FDI in retail allowed

US

$ b

nTotal wholesale and retail trade

Retail sales grew @ 19.6% CAGR for the next 4 years after the introduction of FDI in 1992

Years

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China: The effect of FDI

Modern formats have grown after FDI But so have traditional players

Type No. of stores in 1996

No. of stores in 2001

Traditional 1,920,604  2,565,028

Supermarkets 13,079 152,194

Convenience 18,091

Hypermarkets 593

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Employment in retailing is increasing

Source : China Statistical Yearbook 2001

Employment in Retailing

0

10

20

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90 91 92 93 94 95 96 97 98 99 00 01

Year

Em

plo

ym

ent

in

Reta

il a

nd

whole

sale

(M

n)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

% o

f Tota

l Labor

forc

e

Employment %

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Walmart Entered Chinese market in 1996 Has 43 stores in 19 cities as on date Had sales of US$ 704 mn in 2003 Has employed more than 20,000

people Has paid taxes of US$ 111 mn in

total*

Carrefour Has 54 stores as on date Had sales of US$ 1.6 bn in 2003*

Chinese retailing

Case study : Chinese retailing

Source : company websites

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Strong evidence in favor of FDI FDI improves the entire size of the

industryRetailing in China has grown at a compound rate of 15% per annum after FDI inflow

Employment growth Evolution of modern formats Local players can survive and even

beat foreign competitionNeed for a strong retailing industry in India

Scale is the key to success for local retailers

Lessons from China

Lessons from China

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Agenda

Retailing : An overview

Indian retail

The change factor

FDI in Indian retailing

Why FDI ?

How FDI ?

Case study : Chinese retail

Recommendations

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Grant industry status to retail Permit FDI in Retail in phases Invest in supply chain infrastructure Ease distribution – infrastructure

creation, octroi Ensure single window clearance for

retail chains Organize market for real estate

Ensure proper rent laws Enforce zoning laws and city

development plan Increase land supply

Ensure flexibility of labor laws

Recommendations

Recommendations

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THANK YOU