1.

1 FDI in Retail

After farming, retailing is India’s major occupation. It employs 40 million people. A sizeable
majority of owner/employees are in the business because of lack of other opportunities. The
decade of liberalisation has so far been one of jobless growth. It is no wonder that retail has
become the refuge of these millions. Lopsided economic development is transforming India
from an agrarian economy directly to a service oriented post-industrial society.

The Indian retail industry is highly fragmented. According to AC Nielsen and KSA Techno
park, India has the highest shop density in the world. In 2001, it was estimated that there were
11 outlets for every 1000 people. Since the agriculture sector is over-crowded and the
manufacturing sector stagnant, millions of young Indians are virtually forced into the service
sector. The presence of more than one retailer for every hundred persons is indicative of how
many people are being forced into this form of self employment, despite limitations of capital
and space.

The current debate on allowing foreign direct investment (FDI) in India’s retail trade
primarily focuses on two issues – employment and consumer welfare. Supporters of this
move have developed consumer centric arguments while the opponents are more concerned
with its adverse impact on employment. In a recent article in the Economic and Political
Weekly, Guruswamy et al. (March, 2005) deliberated on this issue in detail and made an
empirical estimation of the future job losses, should the government allow entry of FDI in
retail sector. The estimated job loss ranged between 4,32.000 and 6,20,000. In percentage
terms this works out to over 1.0% –1.5% of current work force of around 40 millions (The
Telegraph; UK, estimates it as 80 millions) engaged in retail trade in India. Though FDI in
retailing is not allowed (as of December 26, 2005), the Government of India has a more
liberal policy towards wholesale trade; franchising and commission agents’ services. Foreign
retailers have already started their operations in India through
 • joint venture where the Indian firm was an export house
• franchising (KFC, Nike)
• sourcing from small-scale sector;
• cash and carry operation (Giant in Hyderabad)
• non-store formats- direct marketing (Amway).

Large international retailers of home furnishing and apparels like Pottery Barn, Gap and
Ralph Lauren have made India as one of their major sourcing hubs. In February 2002, the
world’s largest retailer, Wal-Mart opened a global sourcing office in Bangalore. Up to 100%
FDI is allowed in Cash and Carry wholesale. The Great Wholesaling Club Ltd is one such
example. (Mukherjee, 2000).

In the latest ‘revised conditional offer’ submitted by the GOI to WTO in August 2005, under
article XIX of the GATS, India has offered to undertake extensive commitments in a number
of sectors/sub-sectors including wholesale trade services and distribution services (limited to
services incidental to energy distribution but excluding energy trading and load dispatch
function), marine and air transport services.

In the revised offer by the GOI under the on going GATS negotiation, we observe a
systematic move towards creating the basic infrastructure essential for the smooth
functioning of modern retail chains. The bottlenecks like lack of proper storage facilities and
efficient logistic services have been addressed through liberal FDI policy in air and maritime
transport services and maritime auxiliary services, which included storage and warehousing
services in the ports.

To analyze the effect of FDI on Indian retail sector, we have made two different projections
of Indian economy in the next five years when the level of FDI inflow is expected to increase.
Scenario 1 - The economy grows at a faster rate, say 8% or above and the benefits of growth
‘flows down’ the line (not simply “trickles down”) benefiting even the poorest of the poor.
Economic and social disparity reduces, ‘poverty line’ becomes a topic of economic history,
and purchasing power across different economic class increases and Human Development
Index (HDI) improves substantially.

Scenario II - Economy grows, as predicted, at a higher rate of say 8% but the benefits of
growth “trickles down” at a slower rate. Economic and social disparity widens, middle class
and poorer sections get marginalized, purchasing power of the majority of the population
does not improve, transition towards market economy becomes painful, and we observe a
phase of “jobless growth”. The working class looses its bargaining strength and HDI does not
improve much.

If the social economic condition in the next five years prevails in the same way as described
in Scenario 1, issues like employment loss would loose to attract much attention, as the
expanding economy with better distributional equity would be able to absorb such shocks.
Moreover, with a general rise in purchasing power, consumer would prefer more choices and
better quality of products, which a modern retail chain would be able to offer.

If however, we observe the recent social economic trends, the projection as per Scenario II is
more likely. One of the special features of economic growth in India in the 1990s was the
decline of “employment elasticity” (employment generated per unit growth of output). In
specific terms, while the employment elasticity of the 1980s and early 1990s was 0.5, it
decreased to 0.16 in the late 1990s. The higher capital intensity of economic growth due to
globalization and competitive pressure was responsible for this. No FDI in Retail 5
To tackle the problem of “jobless growth” which became the defining feature of economic
development of India in recent times, the Planning Commission had set up two expert groups.
The first Task Force, under Montek Singh Ahluwalia, was set up in 1999 and produced its
report in 2001. It recommended a number of programs of economic policy reforms, such as
de-reservation of small industries and expanding the role of FDI in small industries and trade.
It emphasized more on the increase in the rate of growth than special programs for creating
jobs. Dissatisfied by the approach of the Task Force, the Planning Commission had set up a
Special Group in 2001 under the Chairmanship of Dr. S. P. Gupta, Member, Planning
Commission, to study the same problem. In the order appointing the Special Group, the
Deputy Chairman of the Planning Commission pointed out that the earlier Task Force had not
paid adequate attention to the issue of the large backlog of under-employment. The Planning
Commission was obviously not quite happy with the emphasis laid by the Task Force on
growth per se (Venkitaramanan, 2002).

Montek Singh Ahluwalia who headed the first Task Force, is back to the management of the
Indian economy with a much higher responsibility as Deputy Chairman of the Planning
Commission. It is most likely that he would pursue the same policies, may be more
aggressively, he recommended earlier. Under such conditions, employment elasticity in the
next five years is likely to decline further resulting to the widening of the economic disparity
among different groups, as projected in the scenario II. Based on this projection, we shall
analyze the likely impact of FDI on major stakeholders of the Indian retail sector through
addressal of few important issues.
I Uniqueness of Indian retail market

The Indian trading sector, which enjoys a few thousand years of history, has some unique
features. These features identified as under, should be considered before allowing FDI into
retail trade.
1. Products and services normally reach the end consumers from the manufacturer / producers
through two different channels: (a) Producers sell via independent retailers (vertical
separation), (b) directly from producer to consumer (vertical integration) .In the later case,
producers establish their own chain of retail outlets; develop franchise (Lafontan and
Slade,1997).
2. In India however, the above two modes of operations are not very common. At present,
less than 3% of the retail transactions in India are done in the organized sector (vertical
separation), which is likely to be increased to 15%- 20% by 2010 (Fitch Ratings, 2003). Till
date, it is restricted to metro cities only. The second type (vertical integration) is common to
few national and subsidiaries of global firms. Moreover, Indian wholesale trade is not
properly organized. Apart from few government initiatives like formation of Tea, Coffee,
Spices Boards; State Trading Corporations- most of which have become defunct by now,
private initiatives have mostly remained localized. The two notable exceptions could be the
recently launched e-procurement network ‘e-chopal’, developed by ITC Ltd- a diversified
cigarette company in which the global tobacco giant the British American Tobacco (BAT)
has substantial stake. Through e-chopal, ITC wants to procure agricultural products directly
from the farmers for their food division. The other initiative has been made by Hindustan
Lever Ltd. (HLL) – the Indian subsidiary of global FMCG giant Unilever. HLL had opened a
separate food division few years ago. Though this division has not contributed much in terms
of revenue, HLL has put in huge resources No FDI in Retail 7
to develop this strategic business unit (SBU). In the last two years, different distribution
models have been tried/ experimented. Recent developments indicate that HLL-Unilever is
moving towards geocentric mode of operation from the age-old polycentric mode. In the new
operational structure, the food division may become the hub for Unilever’s global food
operation.
Baring these exceptions, the commonly used model in India, unlike in developed countries
where large trading companies play a significant intermediate role -like the 11,000 odd
trading companies (‘shosha’) of Japan , is the dominance of small and medium players. The
trading sector is highly fragmented with large number of intermediaries. The wholesale trade
in India is also characterized with the presence of thousands of small commission agents,
stockiest and distributors who operate strictly at a local level. Apart from these, in many
cases the small producers - mostly artisans and farmers, sell their goods directly to the end
consumers through their participation in the market as sellers. Existence of thousands of such
individual producer cum sellers (in some cases it becomes a family affair when say, the father
is a producer and the son is a seller and so on) are examples of “vertical integration” of the
Indian retail sector.
3. The Indian retail sector exhibits a unique example of customer relationship management
where numerous small vendors develop customer relationship with their consumers by
staying closer to them, either by opening a tiny outlet in the residential area or by hawking
goods at the doorstep of the consumers. In this process, a personal relationship, most often
extending beyond the business interest, develops.
4. Another note worthy feature of the Indian retail sector is the absence of any barrier to entry
or exit. Any one can enter or leave the Indian retail sector at any point of time. No FDI in
Retail 8
5. Retail sector contributes 14% of the Indian GDP. Apart from its economic contribution
retail sector immensely contributes to the political system by acting as a shock absorber and
maintaining social stability. Thus when a factory shuts down rendering people jobless; the
farmers remain idle during off seasons or get evicted from the land; the stagnant
manufacturing sector fails to provide jobs to the thousand of unemployed youths; the retail
sector absorb them all. Skilled labor turns into a street hawker, a farmer delivers milk packets
door to door, an educated unemployed youth hawks newspapers and a better off unemployed
person starts a telephone booth and retails telecom cards as an ‘add on’ service. Again when
the factory reopens (in exceptional cases); harvesting time arrives; some of these new
entrants leave the retail trade and return back to their respective jobs.
6. After agriculture, probably, the incidence of disguised unemployment (and under
employment) is highest in the Indian retail sector. Small retailers (nearly 12 million outlets)
most of whom operate in the unorganized sector, dominate the trade. Though Guruswamy
(2005) estimates that more than 6 lakhs of people involved in the unorganized retail sector
would be displaced if global players like Wal-Mart’s capture even 20% of the retail trade, in
reality we may not observe any visible change in the unemployment level. Only the
percentage of disguised employed (rather disguised unemployed) population in the retail
sector would increase.
7. The organized retail sector in India is in its nascent stage. Not a single firm in India (except
retail oil outlets of petroleum companies) has a nation wide presence. All major retail TNCs
still get identified with the home countries like Wal-Mart (USA), Royal Aholds
(Netherlands), Carrefour (France). Absence of a major Indian player with a nation wide
multi-product retail chain will put the Indian retailers at an uneven platform in any form of
bargains vis-à-vis their overseas big brothers It is only fair that the above-No FDI in Retail 9
discussed unique features of the Indian retail sector should get due consideration in the
current debate on inviting FDI in retail trade. No FDI in Retail 10
II Identification of major beneficiaries of FDI – the push and pull factors
Why is the government so keen in inviting FDI in the retail sector? While searching for
this answer, we must remember that already major retailers have entered into the retail
market through franchise and other arrangements. FDI is another such arrangement through
which foreign firms can exercise more control in the management of their Indian operations.
There could be the following possible reasons for inviting FDI in retail trade:
• Organized domestic retailers want to collaborate with the world leaders to expand their
existing business.
• Proprietary expertise in retail trade exists with few global players only. The latter would not
transfer their expertise to local firms unless they are allowed to operate in the domestic
market.
• The government needs FDI to meet foreign currency crisis
• Only the global retailers can satisfy the rising and varied demands of Indian consumers.
• Foreign firms are interested in the growing Indian domestic market.
• India is an emerging procurement hub for global retailers especially for handicraft products
(including textiles) and semi-processed local food items.
• Share of FDI in the trading service is declining in the developed countries. Capital is
looking for a better pasture. Major players are loosing their popularity.
• New rules in international trade encourage movement of FDI across nations to maximize
return on investment.
Analysis of the above possible reasons reveals the truth behind the move. The findings,
which have been presented in a table as, ‘pull and push factors’ give a better insight into this
debate. The first four possible reasons as above may be termed as ‘pull factor’ and the
remaining four as ‘push factors’ No FDI in Retail 11
1. Business Today (May 8, 2005) reported that, among the big Indian retailers, views on FDI
issue was mixed. Those in favor of FDI argued that huge amount (up to Rs.10,000 crore)
would be required in the next five/six years to improve the share of organized retail in India
from current 3% to 10% of the total retail trade. Indian investors were reluctant to invest such
a huge quantity. In this context, it may be argued that unlike in manufacturing, capital
requirements in retail is very low. The vendors substantially finance a large component of the
business – the working capital (Mukherjee, 2002).
2. In the literature on retail, presence of any cutting edge proprietary expertise – either
technical or managerial could not be traced. FDI movement could not be linked to transfer of
any such expertise.
3. The Government of India at present is burdened with huge balance of payment surplus. As
of August 2005, the surplus was $ 133.6 billion. The argument in favor of inviting FDI to
attract foreign exchange is not acceptable.
4. Domestic organized retailers can offer wide range of important products to the consumer.
Moreover through franchise channel, global retailers like KFC, Subway, etc. can offer high
quality service to the domestic clients. On the question of wider choice, new findings suggest
that availability of wider options develop complexity in the consumer decision taking process
leading to stronger brand loyalty! Research reveals that an average grocery store in USA,
offers 35,000 to 40,000 SKUs (stock keeping units) versus 12,000 to 15,000 thirty years ago.
The suppliers offer about 20,000 new items each year; with 1,000 being new efforts while 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 (HBS Working Knowledge, Readers Respond: Is Less
Becoming More? November 14, 2005). Below we mention few recent findings (Heskett,
2005) on this important issue. No FDI in Retail 12
• Management experts questioned whether there were benefits for producers, particularly
those producing increasingly varied products targeted for smaller and smaller market niches.
They reported, “nearly 70 per cent of managers admit that excessive complexity is raising
their costs and hindering their profit growth.” This implied that too much innovation merely
increased complexity without creating economic benefits for either the producer or the
consumer.
• Another expert commented that there were problems associated with too much choice on
the customer’s side. As choice increased, search costs increased, and decisions involved
evaluation of more options. Since human by nature were elementally rational beings, this
could mean that consumers discounted or ignored a lot of the options. This could increase
brand loyalty as a mechanism that reduced search and evaluation costs.
• There was also the issue that with more options, it took longer time to make a decision. At
the same time, due to social changes, consumers had even less time to make choices,
especially for everyday products that have smaller wallet share. This again indicates relying
on known branded items. On the seller side if one could satisfy customers well once, they
might be more likely to stick with that seller even though they have more choices.(HBS
Working Knowledge, Readers Respond: Is Less Becoming More? November 14, 2005).
5. Among the top ten emerging market retail destinations, India ranked 2nd in term of
attractiveness (Business Today). The richest 20% of the Indian population (over 200
millions) who as per 1999 data grabbed over 43% of the total consumable items (HDR 2005,
Page – 235) is a significantly large market for attracting global retailers. Between 1999 and
2003, the No FDI in Retail 13
disposable income of Indian middle class (300 million) has increased by 20% (The
Telegraph, UK).
6. Major retail chains like Wal-Mart and Tesco have already opened their procurement
centers in India. For large-scale procurement operation, they will have to invest in
infrastructure and develop an efficient supply chain. This requires huge investment. By
opening retail chains in the host country they would like to exert monopoly power
eliminating other major buyers from the market. In this context, we must remember that India
is fortunate to be part of two major bio- diversity hot spots out of a few remaining bio-
diversity hot spots of the world. The wide food variety and rich heritage of textile and other
handicrafts makes India a very attractive sourcing destination for retail giants. In the absence
of national champions like Marubenis in India, the small and medium enterprises/ suppliers
of this country will loose the opportunity of earning better revenues in the global market. But
they will have to bear the additional risks of global market fluctuations. Wal-Mart had
procured goods worth $ 1.5 billion from India in 2004, which is expected to touch $ 2. billion
this year. From India, Wal-Mart mainly sources home furnishings, T-shirts, night-suits etc
(HBL, November 15, 2003; May 13,2005). It has also been reported that Wal-Mart has
already proposed to the West Bengal government to take over the fresh food markets of in
and around Kolkata. Though the government has not accepted the proposal as yet, it has not
rejected it either. The government has ‘kept the multinational company waiting’.( HBL,
October 29,2005).
7. Analysis of FDI stock for service sector by industry indicates, between 1990 and 2002, the
share of inward FDI stock in the trade has declined from 25% to 18%. In the same period,
outward FDI stock has declined from 17% to 10%. During the same period, out of the total
inward FDI in trade, developed countries’ share declined to 78% from 90%. Of the remaining
22%, developing countries share were 4% and that of Central and East European (CEE)
countries were No FDI in Retail 14
18%. Undoubtedly, this region has emerged as the hottest destination for trade FDI.
It must be understood that the share of developed countries had declined from 99 per cent in
1990 to 88 per cent in 2002. The estimated world inward FDI, average annual flows, by
sector and industry, between 1989-1991 and 2001-2002 figures indicate that after finance,
trade, and business activities,’ transport, storage and communication’, is the only other
service industry, which attracts relatively high FDI. However, if we take in to account the
share of FDI in trade, compared to other prime service industries, we find a remarkable
decline (between 1991, and 2002) in the share (from 20.15% to 12.35%) of trade but steep
rise in the share of ‘transport, storage and communication’ sector - a sector related to supply
chain management (SCM). In a global economy, SCM is an integral part of trading services.
The above table on FDI data flow also indicates the increasing attractiveness of developing
and CEE countries’ trade sector to the foreign investors.
In February 2005, Wal-Mart Canada, the Canadian arms of Wal-Mart Stores, closed one of
its two Quebec stores, after the company announced the stores financial situation was
‘precarious’. (Datamonitor, 2005), Apart from market saturation in developed countries, it is
reported that retailers like Wal-Mart are facing opposition from local communities.
According to a recent survey under taken in US, 38% respondent had expressed negative
view about the Wal-Mart Stores. 56% of the Americans agreed with the statement that Wal-
Mart was ‘bad for America’ and its prices came ‘with high moral and economic costs’ (HBL,
December3, 2005). Many European countries have also initiated different measures to restrict
the market distorting power of giant retailers. All these factors might have contributed to the
movement of FDI from developed to emerging markets. No FDI in Retail 15
8. Trade liberalization and improvement in communication systems have increased the
opportunity for the retailers to buy their products from producers’ worldwide. Some of the
factors that have contributed to this trend are: reduction in tariff, incentive in foreign
investment, cheaper real time communications, and cheaper transport. Cut throat competition
among major retailers in the develop countries compelled them to take advantage of this
opportunity to maintain their profit. No FDI in Retail 16
III Possible impact on marginal producers and work force - The experiences of other
countries
The third important missing issue in the whole debate is the possible impact of such
action on numerous small and marginal producers especially in the agrarian and handicraft/
handloom sectors. To get an idea about the possible impact on marginal producers and
workers, we shall restrict our discussion to previous research findings on this issue.
1. In April 1999, the Director General of Fair Trading (DGFT) referred to The Competition
Commission, UK, for investigating the supply of groceries from multiple stores in Great
Britain. The Competition Commission identified 24 multiple grocery retailers who supplied
groceries from supermarkets with 600 sq. meters or more of grocery sales area, where the
space devoted to the retail sale of food and non-alcoholic drinks exceeded 300 sq meters and
which were controlled by a person who controlled ten or more such stores.
The major findings of the Commission were:
• Examination of the price trends in the industry revealed an overall decline of 9.4per cent in
the real price of food from 1989 to 1998.
• Regarding pricing practices, the Commission examined five practices allegedly carried out
by the main parties, about which they had received complaints and concluded that three of
them (a) (b) and (c) below distorted competition and gave rise to a complex monopoly
situation. The first two of these (a) and (b) also operated against the public interest:
(a) It was found that all the main parties (with the exception of two) were engaged in No FDI
in Retail 17
the practice of persistently selling some frequently purchased products below cost, and that
this contributed to the situation in which the majority of their products were not fully exposed
to competitive pressure and distorted competition in the supply of groceries.
(b) It was also found that the practice of varying prices in different geographical locations in
the light of local competitive conditions, (‘Price flexing’), was carried on by major retailers.
(c) The Commission observed that Asda, Booth, Budgens, the Co-ops, Safeway, Sainsbury,
Somerfield, Tesco and Waitrose adopted pricing structures and regimes that, by focusing
competition on a relatively small proportion of their product lines, active competition on the
majority of product lines could be restricted. This distorted competition in the retail supply of
groceries because not all the parties’ products were fully exposed to competitive pressure.
• The Commission received many allegations from suppliers about the behavior of the main
parties in the course of their trading relationships. Most suppliers were unwilling to be
named, or to name the main party that was the subject of the allegation. As the Commission
could anticipate a climate of apprehension among many suppliers in their relationship with
the main parties, the Commission had put a list of 52 alleged practices to the main parties and
asked them to tell which of them they had engaged in during the last five years.No FDI in
Retail 18
• It was found that a majority of these practices were carried out by many of the main parties.
They included requiring or requesting from some of their suppliers various non-cost-related
payments or discounts, sometimes retrospectively; imposing charges and making changes to
contractual arrangements without adequate notice; and unreasonably transferring risks from
the main party to the supplier. A request from a main party amounted to the same thing as a
requirement. These practices, as per the Commission, gave rise to a complex monopoly
situation.
• To address these adverse issues effectively, the Commission recommended a statutory Code
of Practice.
2. Oxfam’s research project investigated the condition of millions of poor workers mostly
women who work in different developing countries to fuel export growth. For this, it
interviewed hundreds of women workers and many farm and factory managers, supply chain
agents, retail and brand company staff, unions and government officials. In all, the research
included interviews and surveys spread over 12 countries with 1,310workers, 95 garment
factory owners and managers, 33 farm and plantation owners and managers, 48 government
officials, 98 representatives of unions and non-government organizations (NGOs), 52
importers, exporters, and other supply chain agents, and 17 representatives of brand and retail
companies The research documented the experiences not only of women workers, but also of
their employers, the managers and owners of farms and factories. Few important findings of
the report are:
• Retail and brand companies have positioned themselves as powerful gatekeepers between
the world’s consumers and producers. Their global supply chains stretch from the
supermarket No FDI in Retail 19
shelves and clothes rails in the world’s major shopping centers to the fruit and vegetable
farms of Latin American and Africa and the garment factories of South Asia and China.
• Globalization has hugely strengthened the negotiating hand of retailers and brand
companies. New technologies, trade liberalization, and capital mobility have dramatically
opened up the number of countries and producers from which they can source their products,
creating a growing number of producers vying for a place in their supply chains. These
companies have tremendous power in their negotiations with producers and they use that
power to push the costs and risks of business down the supply chain. Their business model,
focused on maximizing returns for shareholders, demands increasing flexibility through ‘just-
in-time’ delivery, tighter control over inputs and standards, and ever-lower prices.
• Under such pressures, factory and farm managers typically pass on the costs and risks to the
weakest links in the chain: the workers they employ. For many producers, their labor strategy
is simple: make it flexible and make it cheap. Faced with fluctuating orders and falling prices,
they hire workers on short-term contracts, set excessive targets, and sub-contract to sub-
standard unseen producers. Pressured to meet tight turnaround times, they demand that
workers put in long hours to meet shipping deadlines. And to minimize resistance, they hire
workers who are less likely to join trade unions (young women, often migrants and
immigrants) and they intimate or sack those who do stand up for their rights.
• The demands for ‘just-in-time’ delivery have typically cut production times in few sectors
by 30 per cent in five years. Coupled with smaller, less No FDI in Retail 20
predictable orders and high airfreight costs for missed deadlines, the small producers are
pushed to the walls. Moroccan factories producing for Spain’s major department store. E1
Corte Ingles must turn orders round in less than seven days. ‘The shops always need to be full
of new designs, we pull out all the stops to meet the deadline … our image is on the line’ said
one production planning manager. But the image they hide is of young women working up to
16 hours a day to meet those deadlines, underpaid by 40 per cent for their long overtime
working.
• Global supply chains have created new opportunities for labor-intensive exports from low-
cost locations. The result is a dramatic growth in the number of producers, heightening
competition among the world’s factories and farms for a place at the bottom of the chain. At
the top end, however, market share has tended to consolidate among a few leading retailers
and brand names. Such an imbalance between intensely competing producers and relatively
few buyers in the global market put the small suppliers at the receiving end. The owner of a
Brazilian shoe factory, facing intense international competition to sell to leading footwear
retailers in Europe commented: ‘We don’t sell, we get bought’.
• Over the past twenty years, fresh produce and food service industries have headed towards
global consolidation. In the food service industry, US-based Yum Brands has 33,000
restaurants – including Taco Bell, Pizza Hut, and KFC – in over 100 countries, and is
especially focusing on expansion in China, Mexico, and South Korea. Supermarkets –
grocery retailers with multiple stores – dominate food sales in rich countries and are rapidly
expanding their global presence.No FDI in Retail 21
• In the USA, by 1997, supermarkets and even bigger ‘super-centers’ owned by companies
like Wal-Mart and Kroger controlled 92 per cent of fresh-produce retailing. In the UK, by
2003, just five supermarket chains controlled 70 per cent of the market.
• Since supermarkets are increasingly controlling food retailing, the world’s farmers are
competing for a place in their supply chains. It can be good business, especially for farmers
selling top-quality and out-of-season produce. But fresh produce is a risky business. And the
extreme imbalance in negotiating power between a handful of supermarkets and the world’s
farmers means that most of the gains from trade are captured at the top. Supermarkets are
pushing price and payment risks onto farmers and growers, controlling packaging and
delivery requirements, squeezing producers’ margins, and focusing on technical, not ethical
standards.
3. In 1981, an UN study also suggested similar picture of deprivation of local producers. But
Oxfam data shows that during last twenty years, the condition of the poor suppliers of fresh
fruits have deteriorated further. The UN study showed that the ‘retained value’ from the
Philippines bananas sold in the Japanese market by TNCs in 1974 was only 17% of the retail
price. And the Thailand, fresh pineapples in 1978 canned and marketed by US TNC Dole,
earned only 35% of the final consumer value of canned pineapples. Of this 35%, only 10%
went to the share of the agriculturists and rest 25% to processing, packaging etc. which were
predominantly done by TNCs’ subsidiaries. In another recent report (Biz/ed, 2004), which
corroborates with the above observation, it was estimated that in case of bananas sold in
European market by US multinationals, the farmer might get around 10% of the price of a
banana with workers getting anything from 9% No FDI in Retail 22
in the case of Fair-trade bananas to little as 1.5% on traditional farms. In comparison,the
trading companies the likes of Del Monte, Chiquita, Dole and Fyffe’s could be getting up to a
third of the price whilst retailers took around 40%.
4. In a recent documentary film titled Wal-Mart- the High Cost of Low Price, on Wal–Mart,
its director, Robert Greenwald high lighted various practices of the mega retail outlet which
were not expected from a business house who preached ethical business. Commenting on the
film, in Fortune, November 28, 2005,Colvin (2005) wrote ‘’…It is ( the film) a response to
the great social disrupter of our times- the emergence of a friction – free global economy.
This news film, is a cry from the hearts of the people being wrenched from the old world in
the new and not liking it. There are millions of them, and they will demand to be heard in the
media, the markets, and government.’
The government before taking a final decision to allow FDI in retail sector to strengthen this
model of global trade should review the above findings. Small suppliers, unorganized
workers and consumers are the major looser as global retailers and brand owners consolidate
their power through free movement of global capital. GATS have opened up opportunities
before the entrepreneurs of the developing countries to participate in the international trade as
one of the many small suppliers to the global supply chains. The global retailers now
optimize their return on capital through implementation of a complex model of supply chain
management that consists of services, manufactured goods and commodities sourced mostly
from low cost offshore destinations. But this model has an in-built over-exploitive character
that has already been exposed to a large extent by various research findings as above. (Dey,
2005)No FDI in Retail 23
IV Impact on existing labor laws

In the light of recent police atrocities against labors of Honda factory at Gurgaon and
repeated suggestions by advisers and consultants like McKinsey to bring in drastic reforms in
the Indian labor law to make it more flexible allowing easier implementation of the ‘hire and
fire’ policy, one of the findings of the Oxfam report may look very relevant. Governments
should strengthen protection of its workers in the face of intense commercial pressures.
Instead many have traded away workers’ rights, in law or in practice. Under pressure from
local and foreign investors and from IMF and World Bank loan conditions, they have often
allowed labor standards to be defined by the demands of supply chain flexibility: easier hiring
and firing, more short-term contracts, fewer benefits, and longer periods of overtime. It
brings a short-term advantage for trade, but at the risk of a long-term cost to society. The
economic success of the ‘global retailing model’ as propagated by Wal–Marts, Royal Aholds
etc requires flexible labor market to survive. Like many other governments, if Indian
government also abolishes the safe guards it had enacted over the years, to protect its labor
force, the business environment would become conducive for global integration. Enough
indications are already there to apprehend that the government is also planning to bring in
changes, as desired by the external forces, in the existing labor laws.
The government of India has taken an initiative to allow the existing textile firms to
exercise the option of dividing their employees into ‘core’ and ‘non core’ workers. While the
existing labor laws would be applicable to ‘core’ groups, the firm would have the flexibility
to recruit and retrench the ‘non core’ workers provided the unit undertakes that each of these
workers would be employed for 100 days a year. (HBL October 31, 2005) Recently it has
been reported ( ABP 16.11.05) that the communist government of the state of West Bengal
has been seriously considering to ban trade union activities in IT enabled services like Call
centers. The Ministry of Labor, Government of India has already proposed (HBL, October16,
2005) to amend the Contract Labor Act of 1970. No FDI in Retail 24
The industries that the Labor Ministry has suggested for exclusion from the purview of the
Act included, IT, services in ports, railway stations, hospitals, education and training
institutions, guest houses, constructions and maintenance of buildings, roads and bridges,
export oriented units established in Special Economic Zone. We may recall that most of the
services proposed for exemption of the existing contract act are part of the latest submission
of the GOI to the existing negotiation process under GATS. No FDI in Retail 25
V Safeguard options available with the government to protect the interest of small
producers and suppliers
Service TNCs are putting all their efforts to bring in suitable changes in the GATS to
safeguard their vested interest. For example, major associations of global retailers like FTA
(Foreign Trade Association) and European Services Forum (ESF), which has global retail
firms such as Metro, Ahold and Marks & Spencer as members, have taken renewed initiatives
to introduce a separate agreement under WTO on trade and investment to safeguard their
overseas investments. For example in a position paper on trade and investment in April 2003,
European Services Forum demanded, a legally binding, comprehensive WTO agreement on
rules for investment. According to that document (ESF, 2003), a WTO agreement on
investment should:
• Be legally binding and based on the fundamental legal principles of most favored nation and
of national treatment (i.e. non-discrimination);
• Contain:
(a) A stand-still against the introduction of new barriers on to investment;
(b) Post investment protection;
(c) Protection of all material and intellectual property of the company;
(d) Effective protection against direct expropriation as well as against indirect
expropriation through discriminatory treatment
(e) A mechanism for compensation in the case of expropriation
(f) Independent and bind disputes settlement mechanisms;
(g) Right of the company to determine its own ownership structure and provisions on
legal, regulatory and administrative transparency;No FDI in Retail 26
• Promote scheduling of concrete and specific commitments by WTO members, to further
open their markets to foreign direct investment.
Earlier in 2001, FTA demanded for the abolition of any restriction – neither product
exclusion nor sectoral limitation for mode 3 (Commercial presence). It also called for the
strengthening of the investment rules (GATS). Euro Commerce, the employers’
confederation, not only lobbies for liberalization under the GATS agreement, but also pushes
for the reduction of tariffs in NAMA and Agriculture, since the retail sector wishes to import
its merchandise as cheaply as possible.
Before investing in the emerging economies, the global TNCs now want concrete and
specific commitments on unlimited freedom of operation from the host countries. They
expect, all such commitments to be made under GATS frame work so that once any
commitment is made; the host government looses the option to retract from it in future. In
this context, the experience of Thailand, which opened up its retail sector for FDI in the
1980s, could be an eye opener for us. The Thai government liberalized their trading sector
before the GATS negotiation process was started. European retail giants Tesco, Royal Ahold,
Carrefour had set up their operations in Thailand. As expected, many of the traditional
retailers had to down their shutters unable to compete with global firms in an unequal fight.
For example, traditional traders controlled 74% of the retail market in 1997 but by 2002, their
share came down to 60%. Faced with severe criticism from local retailers, the government
announced that they would put control on large retail establishments by imposing the zoning
policy regulation. In 2002, the ‘Retail Business Act’ was enacted to control the expansion of
foreign retailers. However, the Thai government changed their decision on zoning regulation
allegedly under pressure from European Commission (EC) who had requested Thailand to
open up their retail sector through GATS negotiations. As WTO lists zoning laws as “trade
barriers”, it is feared that the Thai government would loose the most effective tool to control
the expansion of giant retail chains if they further open their retail sector through
commitments under the GATS negotiation process. (Deckwirth Christina)No FDI in Retail 27
 India is a larger economy than Thailand with a mature political system. In the changed
global trading environment, to protect the interest of its small producers and workers how
much safeguard the government of India will be able to bargain in the on going GATS’
negotiation process, is another important issue that should be monitored carefully. No FDI in
Retail 28

Benefits of larger FDI

The benefits of larger FDI can be tangibly felt in the domains pertaining totechnological
advancements, generation of export, production improvements, and hastening of
manufacturing employment. Capital inflow into India has increased and so have the exports
from the country. Thanks to the economic boom India is experiencing, some Indian
companies are doing better than even the multinational corporations.

The benefits of larger FDI have been briefly elaborated below:

1. Improved human capital: Indian industries are predominantly labor based but there is
also a significant number of capital based companies. A capital intensive set up is
indeed an expensive proposition but with the existing as well as potential labor
intensive industries, India can look forward to more professional and sophisticated
number of workers and employees at every level. Human capital, in terms of quantity
was never a big problem in India, thanks to its huge population and quality and
efficiency in work has been ushered in by the MNCs.
2. Competition Effect: The benefits of larger FDIs will include the launching and
marketing of new products and brands in the Indian market. New products are used by
the multinational corporations and then demonstrated in the Indian market. The
processes followed by MNCs in India serve to have ademonstration effect on Indian
companies which in turn improves market competition and the standard of products.
This had started in the 1980s due to Japanese firms and as a result, Indian
firms started inculcating the practices of QC, JIT, and QA.

3. Manufacturing Employment: Larger FDIs definitely generate more and

more employment opportunities. The opportunities are highly experienced in the
 manufacturing area. This not only includes the quality human resource but also
provides for quick and efficient work and effective outcomes.

4. New Technology: Technological advancements take place as larger FDIs come in. In
fact, three-fifths of the FDIs result in new and advanced technologies. The local
industry is benefiting from this to a large extent. This as a result, would encourage
more and moreforeign firms for investment.

The benefits of larger FDI are, however, very few in number but as India capitalizes on the
above mentioned benefits, there will be more competition in the market at large and the rural
sector of the country will be in the process of reformation, thus bringing about a socio-
economic stability.

Social Impact of Larger FDI

The social impact of larger FDI is dependent on India's policies and institutions. The
flexibility of the labor market would determine employment opportunities. The extent to
which the lower income groups can take advantage of the growth policies determine the
growth-poverty relationship. The production in the fields of physical and social infrastructure
determine the regional developments. The Indian industries are predominantly labor based
but there are also many capital based companies. Capital intensive set up is an expensive
proposition but India can look forward to more professional and sophisticated number of
workers and employees at all levels. Human capital in terms of quantity was never a big
problem in India due to its huge population added emphasis must be laid on the quality and
efficiency in work. This is brought about by MNCs.

Foreign Direct Investments foster relations, co-operation, and harmony between India and
foreign countries. The social impact of larger FDI include the product market as well because
many new products come into the market as a consequence of FDIs. As a result, the people of
India enjoy unprecedented exposure to branded and quality goods. In fact, various training
methods, personality grooming, and soft skills are given bymultinational
corporations which impart value to human resources.
Owing to social impact of larger FDI, India also enhance its educational system. Since 2003,
the Indian government has been allowing 100% FDIs in education, which means that foreign
schools, colleges, and universities can set up wholly owned subsidiaries in India. Students
passing out of these institutes will be awarded foreign degrees and certificates. The social
impact of larger FDI in education is such that the number of foreign students pursuing higher
education in India has increased by a large margin. Also, the 'brain-drain' issue has also been
checked to a significant extent since the number of students going out of India has also
reduced.

Even the civil society can work with the government and help in reducing bureaucratic
hassles and interferences. The increase in FDI in India is also helping in the liberalization of
labor through which the inequality in wage earnings will be reduced. There is
implementation of higher education and training for the laborers. The health facilities also
increase with better and sophisticated products and processes. India is definitely developing
in a much faster pace now than before but in spite of that, it can be identified that
developments have taken place unevenly. This means that while the more urban areas have
been tapped, the poorer sections are inadequately reached out to. To get the complete picture
of growth, it is essential to make sure that the rural section has equal amount of development
as the urbanized ones. FDI helps to focus in this area thus,fostering social equality and at the
same time a balanced economic growth.

The social impact of larger FDI brings about a more broadminded outlook in the Indian
society, leaving alone a few who would be a bit conservative. However, the condition of the
Indian urban sector has improved drastically thereafter, which we still await the
developments from other areas of the Indian economy.

FMCG Majors Eye Rural India

Rural India is vast with unlimited opportunities. So it’s not surprising that the Indian
FMCG majors are busy putting in place a parallel rural marketing strategy.
The fast-moving consumer goods (FMCG) sector is an important contributor to India’s GDP.
It is the fourth largest sector of the Indian economy. The FMCG market is estimated to treble
from its current figure in the coming decade. Penetration levels as well as per capita
consumption of most product categories like jams, toothpaste, skin care and hair wash in
India are low, indicating the untapped market potential. The growing Indian population,
particularly the middle class and the rural segments, present an opportunity to makers of
branded products to convert consumers to branded products. The Indian rural market with its
vast size and demand base offers a huge opportunity for investment. Rural India has a large
consuming class with 41 per cent of India’s middle-class and 58 per cent of the total
disposable income.

FMCG sector in India

The Indian FMCG sector has a market size of $13.1 billion. Well-established distribution
networks, as well as intense competition between the organised and unorganised segments
are the characteristics of this sector. FMCG in India has a strong and competitive MNC
presence across the entire value chain. It has been predicted that the FMCG market will reach
$33.4 billion in 2015 from $11.6 billion in 2003. The middle class and the rural segments of
the Indian population are the most promising market for FMCG, and give brand makers the
opportunity to convert them to branded products. The Indian economy is surging ahead by
leaps and bounds, keeping pace with rapid urbanisation, increased literacy levels and rising
per capita income. The FMCG sector consists of consumer non-durable products, which
broadly include personal care, household care and food and beverages. It is largely classified
into organised and unorganised segments. The sector is buoyed by intense competition
between these two segments. Besides competition, it is marked by a robust distribution
network coupled with increasing influx of MNCs across the entire value chain. The sector
continues to remain highly fragmented. India’s FMCG sector creates employment for more
than three million people in downstream activities. The total FMCG market is in excess of Rs
850 billion. It is currently growing at double-digit rate and is expected to maintain a high
growth rate.
Exports
India is one of the world’s largest producers of a number of FMCG products but its exports
are a very small proportion of the overall production. Total exports of food processing
industry were $6.9 billion in 2008-09 and marine products accounted for 40 per cent of the
total exports. Though the Indian companies are going global, they are focusing more on the
overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries
because of the similar lifestyle and consumption habits between these countries and India.
Hindustan Lever Limited (HLL), Godrej Consumer, Marico, Dabur and Vicco Laboratories
are amongst the top exporting companies.
Investment in the FMCG sector
The FMCG sector accounts for around 3 per cent of the total FDI inflow and roughly 7.3 per
cent of the total sectoral investment. The food-processing sector attracts the highest FDI,
while the vegetable oils and vanaspati account for the highest domestic investment in the
FMCG sector.

Market Survey

Investment potential in rural markets

The Indian rural market with its vast size and demand base offers a huge opportunity for
investment. Rural India has a large consuming class with 41 per cent of India’s middle-class
and 58 per cent of the total disposable income. With population in the rural areas estimated to
have risen to 153 million households by 2009- 10 and with higher saturation in the urban
markets, future growth in the FMCG sector will come from increased rural and small town
penetration. Technological advances such as the Internet and e-commerce will aid in better
logistics and distribution in these areas.

Critical operating rules

1. Heavy launch costs for new products on launch advertisements, free samples and product
promotions
2. Majority of the product classes require very low investment in fixed assets
3. Existence of contract manufacturing
4. Marketing assumes a signifi-cant place in the brand-building process
5. Extensive distribution networks and logistics are key to achieving a high level of
penetration in both the urban and rural markets
6. Factors like low-entry barriers in terms of low capital investment, fiscal incentives from
government and low brand awareness in rural areas have led to mushrooming of the
unorganised sector
7. Providing good price points is the key to success

Demand for FMCG products is set to boom by more than 100 per cent by 2015. It will be
driven by a rise in the share of the middle class from 67 per cent in 2009 to 88 per cent in
2015. The boom in various consumer categories, further, indicates a latent demand for
various product segments. For example, the upper end of very rich and a part of the
consuming class indicate a small but rapidly growing segment for branded products. The
middle segment, on the other hand, indicates a large market for the mass end products. The
BRICs report indicates that India’s per capita disposable income, currently at $556 per
annum, will rise to $1150 by 2015—another FMCG demand driver. Spurt in the industrial
and services sector growth is also likely to boost the urban consumption demand.

SWOT Analysis of the FMCG Industry

Strengths

1. Low operating costs

2. Established distribution networks in both urban and rural areas
3. Presence of well-known brands in the FMCG sector

Weaknesses

1. Lower scope of investing in technology and achieving economies of scale, especially in

small sectors
2. Low exports levels
3. ‘Me-too’ products, which illegally mimic the labels of the established brands. These
products narrow the scope of FMCG products in rural and semi-urban markets

Opportunities
1. Untapped rural market
2. Rising income levels, i.e., increase in purchasing power of consumers
3. Large domestic market—population of over one billion
4. Export potential
5. High consumer goods spending

Threats

1. Removal of import restrictions resulting in replacing of domestic brands

2. Slowdown in rural demand
3. Tax and regulatory structure

Rural marketing
Rural marketing has become the latest marketing mantra of most FMCG majors. True, rural
India is vast with unlimited opportunities, waiting to be tapped by FMCGs. So it’s not
surprising that the Indian FMCG sector is busy putting in place a parallel rural marketing
strategy. Among the FMCG majors, Hindustan Lever, Marico Industries, Colgate-Palmolive
and Britannia Industries are a few of the FMCG majors who have been gung-ho about rural
marketing. Seventy per cent of the nation’s population, i.e., rural India, can bring in the
much-needed volumes and help FMCG companies to log in volume-driven growth. That
should be music to FMCGs who have already hit saturation points in urban India.

Government policy
The Indian government has enacted policies aimed at attaining international competitiveness
through lifting of the quantitative restrictions, reducing excise duties, automatic foreign
investment and food laws, resulting in an environment that fosters growth. 100 per cent
export-oriented units can be set up by government approval and use of foreign brand names is
now freely permitted.

Central and state initiatives

Recently, the government has announced a cut of 4 per cent in excise duty to fight slowdown
of the economy. This announcement has a positive impact on the industry. But the benefit
from the 4 per cent reduction in excise duty is unlikely to be uniform across FMCG
categories or players. The changes in excise duty do not impact cigarettes (ITC, Godfrey
Phillips), biscuits (Britannia Industries, ITC) or ready-to-eat foods, as these products are
either subject to specific duty or exempt from excise. Even players with manufacturing
facilities located mainly in tax-free zones will also not see material excise duty savings. Only
large FMCG-makers may be the key ones to gain on excise cut.

Foreign direct investment

Automatic investment approval (including foreign technology agreements within specified
norms), up to 100 per cent foreign equity or 100 per cent for NRI and overseas corporate
bodies (OCBs) investment, is allowed for most of the food processing sector, except for
malted food, alcoholic beverages and those reserved for small-scale industries.

Blue-print for the future

There is a huge growth potential for all the FMCG companies as the per capita consumption
of almost all products in the country is amongst the lowest in the world. The demand or
prospect could be increased further if these companies can change the consumer’s mindset
and offer new-generation products. Earlier, Indian consumers were using nonbranded
apparel, but today, clothes of different brands are available and the same consumers are
willing to pay more for branded clothes. It’s the quality, promotion and innovation of
products that can drive many sectors. Explosion of the young-age population in India will
trigger a spurt in confectionary products. In the long run, the industry is slated to grow at 8 to
10 per cent annually to 870,000 metric tonnes by 2011-12.
The Indian FMCG sector is the fourth largest sector in the economy with a total market size
in excess of US$ 13.1 billion. It has a strong MNC presence and is characterised by a well
established distribution network, intense competition between the organised and unorganised
segments and low operational cost. Availability of key raw materials, cheaper labour costs
and presence across the entire value chain gives India a competitive advantage. The FMCG
market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. Penetration
level as well as per capita consumption in most product categories like jams, toothpaste, skin
care, hair wash etc in India is low indicating the untapped market potential. Burgeoning
Indian population, particularly the middle class and the rural segments, presents an
opportunity to makers of branded products to convert consumers to branded products.
Growth is also likely to come from consumer 'upgrading' in the matured product categories.
With 200 million people expected to shift to processed and packaged food by 2010, India
needs around US$ 28 billion of investment in the food-processing industry.
WHY INDIA

Large domestic market

India is one of the largest emerging markets, with a population of over one billion. India is
one of the largest economies in the world in terms of purchasing power and has a strong
middle class base of 300 million.

Rural and urban potential

Rural-urban profile
Urban Rural
Population 2001-02 (mn household) 53 135
Population 2009-10 (mn household) 69 153
% Distribution (2001-02) 28 72
Market (Towns/Villages) 3,768 627,000
Universe of Outlets (mn) 1 3.3
Source: Statistical Outline of India (2001-02), NCAER

Around 70 per cent of the total households in India (188 million) resides in the rural areas.
The total number of rural households is expected to rise from 135 million in 2001-02 to 153
million in 2009-10. This presents the largest potential market in the world. The annual size of
the rural FMCG market was estimated at around US$ 10.5 billion in 2001-02. With growing
incomes at both the rural and the urban level, the market potential is expected to expand
further.
India - a large consumer goods spender

An average Indian spends around 40 per cent of his income on grocery and 8 per cent on
personal care products. The large share of fast moving consumer goods (FMCG) in total
individual spending along with the large population base is another factor that makes India
one of the largest FMCG markets.

Consumption pie

Even on an international scale, total consumer expenditure on food in India at US$ 120
billion is amongst the largest in the emerging markets, next only to China.
Change in the Indian consumer profile

Rapid urbanisation, increased literacy and rising per capita income, have all caused rapid
growth and change in demand patterns, leading to an explosion of new opportunities. Around
45 percent of the population in India is below 20 years of age and the young population is set
to rise further. Aspiration levels in this age group have been fuelled by greater media
exposure, unleashing a latent demand with more money and a new mindset.

Demand-supply gap
Currently, only a small percentage of the raw materials in India are processed into value
added products even as the demand for processed and convenience food is on the rise. This
demand supply gap indicates an untapped opportunity in areas such as packaged form,
convenience food and drinks, milk products etc. In the personal care segment, the low
penetration rate in both the rural and urban areas indicates a market potential.

FMCG Category and products

Category Products

Household Care Fabric wash (laundry soaps and synthetic

detergents); household cleaners (dish/utensil

cleaners, floor cleaners, toilet cleaners, air

fresheners, insecticides and mosquito

repellents,

metal polish and furniture polish).

Food and Beverages Health beverages; soft drinks; staples/cereals;

bakery products (biscuits, bread, cakes);
snack

food; chocolates; ice cream; tea; coffee; soft

drinks; processed fruits, vegetables; dairy

products; bottled water; branded flour;

branded

rice; branded sugar; juices etc.

Personal Care Oral care, hair care, skin care, personal wash

(soaps); cosmetics and toiletries; deodorants;

perfumes; feminine hygiene; paper products.

INDIA COMPETITIVENESS AND
COMPARISON WITH THE WORLD
MARKETS
Materials availability
India has a diverse agro-climatic condition due to which there exists a wide-ranging and large
raw material base suitable for food processing industries. India is the largest producer of
livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of
rice, wheat and fruits & vegetables. India also has an ample supply of caustic soda and soda
ash, the raw materials in the production of soaps and detergents – India produced 1.6 million
tonnes of caustic soda in 2003-04. Tata Chemicals, one of the largest producers of synthetic
soda ash in the world is located in India. The availability of these raw materials gives India
the locational advantage.

Cost competitiveness

Apart from the advantage in terms of ample raw material availability, existence of low-cost
labour force also works in favour of India. Labour cost in India is amongst the lowest in
Asian countries. Easy raw material availability and low labour costs have resulted in a lower
cost of production. Many multi-nationals have set up large low cost production bases in India
to outsource for domestic as well as export markets.

Leveraging the cost advantage

Global major, Unilever, sources a major portion of its product requirements from its Indian
subsidiary, HLL. In 2003-04, Unilever outsourced around US$ 218 million of home and
personal care along with food products to leverage on the cost arbitrage opportunities with
the West. To take another case, Procter & Gamble (P&G) outsourced the manufacture of
Vicks Vaporub to contract manufacturers in Hyderabad, India. This enables P&G to continue
exporting Vicks Vaporub to Australia, Japan and other Asian countries, but at more
competitive rates, whilst maintaining its high quality and cost efficiency.

Presence across value chain

Indian firms also have a presence across the entire value chain of the FMCG industry from
supply of raw material to final processed and packaged goods, both in the personal care
products and in the food processing sector. For instance, Indian firm Amul's product portfolio
includes supply of milk as well as the supply of processed dairy products like cheese and
butter. This makes the firms located in India more cost competitive.

POLICY
India has enacted policies aimed at attaining international competitiveness through lifting of
the quantitative restrictions, reduced excise duties, automatic foreign investment and food
laws resulting in an environment that fosters growth. 100 per cent export oriented units can
be set up by government approval and use of foreign brand names is now freely permitted.

FDI Policy
Automatic investment approval (including foreign technology agreements within specified
norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate
Bodies
(OCBs) investment, is allowed for most of the food processing sector except malted food,
alcoholic beverages and those reserved for small scale industries (SSI). 24 per cent foreign
equity is permitted in the small-scale sector. Temporary approvals for imports for test
marketing can also be obtained from the Director General of Foreign Trade. The evolution of
a more liberal FDI policy environment in India is clearly supported by the successful
operation of some of the global majors like PepsiCo in India.

PepsiCo's India experience

After a not so successful attempt to enter the Indian market in 1985, Pepsi re-entered in 1988
with a joint venture of PepsiCo, Punjab government-owned Punjab Agro Industrial
Corporation (PAIC) and Voltas India Limited. By 1994, Pepsi took advantage of the
liberalised policies and took control of Pepsi Foods by making an offer to both Voltas and
PAIC to buy their equity. The
Indian government gave concessions to the company, Pepsi was allowed to increase its
turnover of beverages component to beyond 25 per cent and was no longer restricted by its
commitment to export 50 per cent of its turnover. The government approved more than US$
400 million worth of investment of which over US$ 330 million has already been invested.
The government also allowed PepsiCo to set up a new company in India called PepsiCo India
Holdings Pvt Ltd, a wholly owned subsidiary of PepsiCo International, which is engaged in
beverage manufacturing, bottling and exports activities as Pepsi Foods Ltd. Since then, the
company has bought over bottlers in different parts of India along with Dukes, a popular soft-
drink brand in western India to consolidate its market share. This was followed by an
introduction of Tropicana juice in the New Delhi and Bangalore markets in 1999. Currently,
soft drink concentrate, snack foods and vegetable and food processing are the key products of
the company. Pepsi considers India, along with China, as one of the two largest and fastest
growing businesses outside North America. Pepsi has 19 company owned factories while
their Indian bottling partners own 21. The company has set up 8 greenfield sites in backward
regions of different states. PepsiCo intends to expand its operations and is planning an
investment of approximately US$ 150 million in the next two-three years.

Removal of Quantitative Restrictions and Reservation Policy

The Indian government has abolished licensing for almost all food and agro-processing
industries except for some items like alcohol, cane sugar, hydrogenated animal fats and oils
etc., and items reserved for the exclusive manufacture in the small scale industry (SSI) sector.
Quantitative restrictions were removed in 2001 and Union Budget 2004-05 further identified
85 items that would be taken out of the reserved list. This has resulted in a boom in the
FMCG market through market expansion and greater product opportunities.

Central and state initiatives

Various states governments like Himachal Pradesh, Uttaranchal and Jammu & Kashmir have
encouraged companies to set up manufacturing facilities in their regions through a package of
fiscal incentives. Jammu and Kashmir offers incentives such as allotment of land at
concessional rates, 100 per cent subsidy on project reports and 30 per cent capital investment
subsidy on fixed capital investment upto US$ 63,000. The Himachal Pradesh government
offers sales tax and power concessions, capital subsidies and other incentives for setting up a
plant in its tax free zones. Five-year tax holiday for new food processing units in fruits and
vegetable processing have also been extended in the Union Budget 2004-05. Wide-ranging
fiscal policy changes have been introduced progressively. Excise and import duty rates have
been reduced substantially. Many processed food items are totally exempt from excise duty.
Customs duties have been substantially reduced on plant and equipment, as well as on raw
materials and intermediates, especially for export production. Capital goods are also freely
importable, including second hand ones in the food-processing sector.
Food laws
Consumer protection against adulterated food has been brought to the fore by "The
Prevention of Food Adulteration Act (PFA), 1954", which applies to domestic and imported
food commodities, encompassing food colour and preservatives, pesticide residues,
packaging, labelling and regulation of sales.

TRENDS AND PLAYERS

The structure
The Indian FMCG sector is the fourth largest sector in the economy and creates employment
for three million people in downstream activities. Within the FMCG sector, the Indian food
processing industry represented 6.3 per cent of GDP and accounted for 13 per cent of the
country's exports in 2003-04. A distinct feature of the FMCG industry is the presence of most
global players through their subsidiaries (HLL, P&G, Nestle), which ensures new product
launches in the Indian market from the parent's portfolio.

Critical operating rules in Indian FMCG sector

• Heavy launch costs on new products on launch advertisements, free samples and product
promotions.
• Majority of the product classes require very low investment in fixed assets
• Existence of contract manufacturing
• Marketing assumes a significant place in the brand building process
• Extensive distribution networks and logistics are key to achieving a high level of
penetration in both the urban and rural markets
• Factors like low entry barriers in terms of low capital investment, fiscal incentives from
government and low brand awareness in rural areas have led to the mushrooming of the
unorganised sector
• Providing good price points is the key to success

Penetration and per capita consumption

Penetration level in most product categories like jams, toothpaste, skin care, hair wash etc in
India is low. The contrast is particularly striking between the rural and urban segments - the
average consumption by rural households is much lower than their urban counterparts. Low
penetration indicates the existence of unsaturated markets, which are likely to expand as the
income levels rise. This provides an excellent opportunity for the industry players in the form
of a vastly untapped market. Moreover, per capita consumption in most of the FMCG
categories (including the high penetration categories) in India is low as compared to both the
developed markets and other emerging economies. A rise in per capita consumption, with
improvement in incomes and affordability and change in tastes and preferences, is further
expected to boost FMCG demand. Growth is also likely to come from consumer "upgrading",
especially in the matured product categories.

Detergent per capita consumption (in kg) (2001)

Tea per capita consumption (in kg) (2001)

Personal wash per capita consumption (in kg) (2001)

Toothpaste per capita consumption (in kg) (2001)

Skin care products per capita consumption (in Rs) (2001)

Ice cream per capita consumption (in litre) (2001)

Shampoo per capita consumption (in kg) (2001)

Fabric wash per capita consumption (in kg) (2001)

The rural urban break-up

Indian FMCG market – urban

Indian FMCG market – rural

Most Indian FMCG companies focus on urban markets for value and rural markets for
volumes. The total market has expanded from US$ 17.6 billion in 1992-93 to US$ 22 billion
in 1998-99 at current prices. Rural demand constituted around 52.5 per cent of the total
demand in 1998-99. Hence, rural marketing has become a critical factor in boosting
bottomlines. As a result, most companies' have offered low price products in convenient
packaging. These contribute the majority of the sales volume. In comparison, the urban elite
consumes a proportionately higher value of FMCGs, but not volume.

Rural markets: small is beautiful

By the early nineties FMCG marketers had figured out two things
• Rural markets are vital for survival since the urban markets were getting saturated
• Rural markets are extremely price-sensitive
Thus, a number of companies followed the strategy of launching a wide range of package
sizes and prices to suit the purchasing preferences of India's varied consumer segments.
Hindustan Lever, a subsidiary of Unilever, coined the term nano-marketing in the early
nineties, when it introduced its products in small sachets. Small sachets were introduced in
almost all the FMCG segments from oil, shampoo, and detergents to beverages. Cola major,
Coke, brought down the average price of its products from around twenty cents to ten cents,
thereby bridging the gap between soft drinks and other local options like tea, butter milk or
lemon juice. It also doubled the number of outlets in rural areas from 80,000 during 2001 to
160,000 the next year, thereby almost doubling its market penetration from 13 per cent to 25
per cent. This along with greater marketing, led to the rural market accounting for 80 per cent
of new Coke drinkers and 30 per cent of its total volumes. The rural market for colas grew at
37 per cent in 2002, against a 24 per cent growth in urban areas. The per capita consumption
in rural areas also doubled during 2000-02.

Consumer-class boom

Household income distribution – 2003

Household income distribution – 2015

Demand for FMCG products is set to boom by almost 60 per cent by 2007 and more than 100
per cent by 2015. This will be driven by the rise in share of middle class (defined as the
climbers and consuming class) from 67 per cent in 2003 to 88 per cent in 2015. The boom in
various consumer categories, further, indicates a latent demand for various product segments.
For example, the upper end of very rich and a part of the consuming class indicate a small but
rapidly growing segment for branded products.The middle segment, on the other hand,
indicates a large market for the mass end products. The BRICs report indicates that India's
per capita disposable income, currently at US$ 556 per annum, will rise to US$ 1150 by 2015
- another FMCG demand driver. Spurt in the industrial and services sector growth is also
likely to boost the urban consumption demand.
Rise in Indian disposable income (US$/annum)

Identifying the segments in FMCG

A brief description of the Indian FMCG industry is given in the table below.

Product wise production (2004)

Household care
The size of the fabric wash market is estimated to be US$ 1 billion, household cleaners to be
US$ 239 million and the production of synthetic detergents at 2.6 million tonnes. The
demand for detergents has been growing at an annual growth rate of 10 to 11 per cent during
the past five years. The urban market prefers washing powder and detergents to bars on
account of convenience of usage, increased purchasing power, aggressive advertising and
increased penetration of washing machines. The regional and smallunorganised players
account for a major share of the total detergent market in volumes.

Personal care
The size of the personal wash products is estimated at US$ 989 million; hair care products at
US$ 831 million and oral care products at US$ 537 million. While the overall personal wash
market is growing at one per cent, the premium and middle-end soaps are growing at a rate of
10 per cent. The leading players in this market are HLL, Nirma, Godrej Soaps and Reckitt &
Colman. The oral care market, especially toothpastes, remains under penetrated in India (with
penetration level below 45 per cent) due to lack of hygiene awareness among rural markets.
The industry is very competitive both for organised and smaller regional players.
The Indian skin care and cosmetics market is valued at US$ 274 million and dominated by
HLL, Colgate Palmolive, Gillette India and Godrej Soaps. This segment has witnessed the
entry of a number of international brands, like Oriflame, Avon and Aviance leading to
increased competition. The coconut oil market accounts for 72 per cent share in the hair oil
market. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the
leading players.
The market for branded coconut oil is valued at approximately US$ 174 million.

Food and Beverages

Food
According to the Ministry of Food Processing, the size of the Indian food processing industry
is around US$ 65.6 billion including US$ 20.6 billion of value added products. Of this, the
health beverage industry is valued at US$ 230 billion; bread and biscuits at US$ 1.7 billion;
chocolates at US$ 73 million and ice creams at US$ 188 million. The size of the semi-
processed/ready to eat food segment is over US$ 1.1 billion. Large biscuits & confectionery
units, soyaprocessing units and starch/glucose/sorbitol producing units have also come up,
catering to domestic and international markets. The three largest consumed categories of
packaged foods are packed tea, biscuits and soft drinks.

Beverages
The Indian beverage industry faces over supply in segments like coffee and tea. However,
more than half of this is available in unpacked or loose form. Indian hot beverage market is a
tea dominant market. Consumers in different parts of the country have heterogeneous tastes.
Dust tea is popular in southern India, while loose tea in preferred in western India. The urban-
rural split of the tea market was 51:49 in 2000. Coffee is consumed largely in the southern
states. The size of the total packaged coffee market is 19,600 tonnes or US$ 87 million. The
urban rural split in the coffee market was 61:39 in 2000 as against 59:41 in 1995. The total
soft drink (carbonated beverages and juices) market is estimated at 284 million crates a year
or US$ 1 billion. The market is highly seasonal in nature with consumption varying from 25
million crates per month during peak season to 15 million during offseason. The market is
predominantly urban with 25 per cent contribution from rural areas. Coca cola and Pepsi
dominate the Indian soft drinks market. Mineral water market in India is a 65 million crates
(US$ 50 million) industry. On an average, the monthly consumption is estimated at 4.9
million crates, which increases to 5.2 million during peak season.

Exports
India is one of the world's largest producers for a number of FMCG products but its exports
are a very small proportion of the overall production. Total exports of food processing
industry was US$ 2.9 billion in 2001-02 and marine products accounted for 40 per cent of the
total exports. Though the Indian companies are going global, they are focusing more on the
overseas markets like Bangladesh, Pakistan, Nepal, Middle East and the CIS countries
because of the similar lifestyle and consumption habits between these countries and India.
HLL, Godrej Consumer, Marico, Dabur and Vicco laboratories are amongst the top exporting
companies.
Investment in the FMCG sector
The FMCG sector accounts for around 3 per cent of the total FDI inflow and roughly 7.3 per
cent of the total sectoral investment. The food-processing sector attracts the highest FDI,
while the vegetable oils and vanaspati sector accounts for the highest domestic investment in
the FMCG sector.
Source: SIA Newsletter, DIPP.

Investments in the FMCG sector (August 1991-April 2004)

Domestic players
Britannia India Ltd (BIL)
Britannia India Ltd was incorporated in 1918 as Britannia Biscuit Co Ltd and currently the
Groupe Danone (GD) of France (a global major in the food processing business) and the
Nusli Wadia Group hold a 45.3 per cent equity stake in BIL through AIBH Ltd (a 50:50 joint
venture). BIL is a dominant player in the Indian biscuit industry, with major brands such as
Tiger glucose, Mariegold, Fifty-Fifty, Good Day, Pure Magic, Bourbon etc. The company
holds a 40 per cent market share in the overall organised biscuit market and has a capacity of
300,000 tonne per annum. Currently, the bakery product business accounts for 99.1 per cent
of BIL's turnover. The company reported net sales of US$ 280 million in 2002-03. Britannia
Industries Ltd (BIL) plans to increase its manufacturing capacity through outsourced contract
manufacturing and a greenfield plant in Uttaranchal to expand its share in the domestic
biscuit and confectionery market.

Dabur India Ltd

Established in 1884, Dabur India Ltd is the largest Indian FMCG and ayurvedic products
company. The group comprises Dabur Finance, Dabur Nepal Pvt Ltd, Dabur Egypt Ltd,
Dabur Overseas Ltd and Dabur International Ltd. The product portfolio of the company
includes health care, food products, natural gums & allied chemicals, pharma, and veterinary
products. Some of its leading brands are Dabur Amla, Dabur Chyawanprash, Vatika,
Hajmola, Lal Dant Manjan, Pudin Hara and the Real range of fruit juices. The company
reported net sales of US$ 218 million in 2003- 04. Dabur has firmed up plans to restructure
its sales and distribution structure and focus on its core businesses of fast-moving consumer
good products and over-the-counter drugs. Under the restructured set-up, the company plans
to increase direct coverage to gap outlets and gap towns where Dabur is not present. A
roadmap is also being prepared to rationalise the stockists' network in different regions
between various products and divisions.

Indian Tobacco Corporation Ltd (ITCL)

Indian Tobacco Corporation Ltd is an associate of British American Tobacco with a 37 per
cent stake. In 1910 the company's operations were restricted to trading in imported cigarettes.
The company changed its name to ITC Limited in the mid seventies when it diversified into
other businesses. ITC is one of India's foremost private sector companies with a turnover of
US$ 2.6 billion. While ITC is an outstanding market leader in its traditional businesses of
cigarettes, hotels, paperboards, packaging and agriexports, it is rapidly gaining market share
even in its nascent businesses of branded apparel, greeting cards and packaged foods and
confectionary. After the merger of ITC Hotels with ITC Ltd, the company will ramp up its
growth plans by strengthening its alliance with Sheraton and through focus on international
projects in Dubai and the Far East. ITC's subsidiary, International Travel House (ITH) also
aims to launch new products and services by way of boutiques that will provide complete
travel services.

Marico
Marico is a leading Indian Group incorporated in 1990 and operating in consumer products,
aesthetics services and global ayurvedic businesses. The company also markets food products
and distributes third party products. Marico owns well-known brands such as
Parachute, Saffola, Sweekar, Shanti Amla, Hair & Care, Revive,
Mediker, Oil of Malabar and the Sil range of processed foods. It has six factories, and sub-
contract facilities for production. In 2003-04, the company reported a turnover of US$ 200
million. The overseas sales franchise of Marico's branded FMCG products is one of the
largest amongst Indian companies. It is also the largest Indian FMCG company in
Bangladesh. The company plans to capture growth through constant realignment of portfolio
along higher margin lines and focus on volume growth, consolidation of market shares,
strengthening flagship brands and new product offerings (2-3 new product launches are
expected in 2004-05). It also plans to expand its international business to Pakistan.

Nirma Limited
Nirma Ltd, promoted by Karsanbhai Patel, is a homegrown FMCG major with a presence in
the detergent and soap markets. It was incorporated in 1980 as a private company and was
listed in fiscal 1994. Associate companies' Nirma Detergents, Shiva Soaps and Detergents,
Nirma Soaps and Detergents and Nilnita Chemicals were merged with Nirma in 1996-1997.
The company has also set up a wholly owned subsidiary Nirma Consumer Care Ltd, which is
the sole marketing licensee of the Nirma brand in India. Nirma also makes alfa olefin, fatty
acid and glycerine. Nirma is one of the most successful brands in the rural markets with
extremely low priced offerings. Nirma has plants located in Gujarat, Madhya Pradesh and
Uttar Pradesh. Its new LAB plant is located in Baroda and the soda ash complex is located in
Gujarat. Nirma has strong distributor strength of 400 and a retail reach of over 1 million
outlets. The company reported gross sales of US$ 561 million in 2003-04. It plans to continue
to target the mid and mass segments for future growth.

Foreign players

Cadbury India Ltd (CIL)

Cadbury Indian Ltd is a 93.5 per cent subsidiary of Cadbury Schweppes Plc, UK, a global
major in the chocolate and sugar confectionery industry. CIL was set up as a trading concern
in 1947 and subsequently began its operations with the small scale processing of imported
chocolates and food drinks. CIL is currently the largest player in the chocolate industry in
India with a 70 per cent market share. The company is also a key player in the malted foods,
cocoa powder, drinking chocolate, malt extract food and sugar confectionery segment. The
company had also entered the soft drinks market with brands like 'Canada Dry' and 'Crush',
which were subsequently sold to Coca Cola in 1999. Established brands include Dairy Milk,
Perk, Crackle, 5 Star, Éclairs, Gems, Fructus, Bournvita etc. The company reported net sales
of US$ 160 million in 2003. The company plans to increase the number of retail outlets for
future growth and market expansion.

Cargill
Cargill Inc is one of the world's leading agri-business companies with a strong presence in
processing and merchandising, industrial production and financial services. Its products and
geographic diversity (over 40 product lines with a direct presence in over 65 countries and
business activities in about 130 countries) as well as its vast communication and
transportation network help optimise commodity movements and provide competitive
advantage. Cargill India was incorporated in April 1996 as a 100 per cent subsidiary of Inc of
the US. It is engaged in trading in soyabean meals, wheat, edible oils, fertilisers and other
agricultural commodities besides marketing branded packaged foods. It has also set up its
own anchorage facilities at Rosy near Jamnagar in Gujarat for efficient handling of its import
and export consignments.

Coca Cola
Coca-Cola started its India operations in 1993. The Coca-Cola system in India comprises 27
wholly company-owned bottling operations and another 17 franchisee-owned bottling
operations. A network of 29 contract-packers also manufacture a range of products for the
company. Leading Indian brands Thums Up, Limca, Maaza, Citra and Gold Spot exist in the
Company's international family of brands along with Coca-Cola, Diet Coke, Kinley, Sprite
and Fanta, plus the Schweppes product range. During the past decade, the Coca-Cola system
has invested more than US$ 1 billion in India. In 2003, Coca-Cola India pledged to invest a
further US$ 100 million in its operations.

Colgate-Palmolive India
Colgate Palmolive India is a 51 per cent subsidiary of Colgate Palmolive Company, USA. It
is the market leader in the Indian oral care market, with a 51 per cent market share in the
toothpaste segment, 48 per cent market share in the toothpowder market and a 30 per cent
share in the toothbrush market. The company also has a presence in the premium toilet soap
segment and in shaving products, which are sold under the Palmolive brand. Other
wellknown consumer brands include Charmis skin cream and Axion dish wash. The company
reported sales of US$ 226 million in 2003-04. The company's strategy is to focus on growing
volumes by improving penetration through aggressive campaigning and consumer
promotions. The company plans to launch new products in oral and personal care segments
and is prepared to continue spending on advertising and marketing to gain market share.
Margin gains are being targeted through efficient supply chain management and bringing
down cost of operations.

H J Heinz Co
A US$ 8.4 billion American foods major, H J Heinz Co comprises 4,000 strong brand buffet
in infant food, sauces and condiments. The company was the first to commence
manufacturing and bottling of tomato ketchup in 1876. In India, Heinz has a presence through
its 100 per cent subsidiary Heinz India Pvt Ltd. Heinz acquired the consumer products
division of pharmaceutical major Glaxo in 1994. Heinz's product range in India consists of
Complan milk beverage, health drink Glucon-D, infant food Farex and Nycil prickly heat
powder, besides the Heinz ketchup range.

Hindustan Lever Ltd (HLL)

Hindustan Lever Ltd is a 51 per cent owned subsidiary of the Anglo-Dutch giant Unilever,
which has been expanding the scope of its operations in India since 1888. It is the country's
biggest consumer goods company with net sales of US$ 2.4 billion in 2003. HLL is amongst
the top five exporters of the country and also the biggest exporter of tea and castor oil. The
product portfolio of the company includes household and personal care products like soaps,
detergents, shampoos, skin care products, colour cosmetics, deodorants and fragrances. It is
also the market leader in tea, processed coffee, branded wheat flour, tomato products, ice
cream, jams and squashes. HLL enjoys a formidable distribution network covering over
3,400 distributors and 16 million outlets. In the future, the company plans to concentrate on
its herbal health care portfolio (Ayush) and confectionary business (Max). Its strategy to
grow includes focussing on the power brands' growth through consumer relevant information,
cross category extensions, leveraging channel opportunities and increased focus on rural
growth.

Nestle India Ltd (NIL)

Nestle India Ltd a 59.8 per cent subsidiary of Nestle SA, Switzerland, is a leading
manufacturer of food products in India. Its products include soluble coffee, coffee blends and
teas, condensed milk, noodles (81 per cent market share), infant milk powders (75 per cent
market share) and cereals (80 per cent market share). Nestle has also established its presence
in chocolates, confectioneries and other processed foods. Soluble beverages and milk
products are the major contributors to Nestle's total sales. Some of Nestle's popular brands are
Nescafe, Milkmaid, Maggi and Cerelac. The company has entered the chilled dairy segment
with the launch of Nestle Dahi and Nestle Butter. Nestle has also made a foray in non-
carbonated cold beverages segment through placement of Nestea iced tea and Nescafe Frappe
vending machines. Exports contribute to 23 per cent of its turnover and the company
reported net sales of US$ 440 million in 2003.

PepsiCo
PepsiCo is a world leader in convenient foods and beverages, with revenues of about US$ 27
billion. PepsiCo brands are available in nearly 200 markets across the world. The company
has an extremely positive outlook for India. "Outside North America two of our largest and
fastest growing businesses are in India and China, which include more than a third of the
world's population" (Pepsico's annual report). PepsiCo entered India in 1989 and is
concentrating on three focus areas - soft drink concentrate, snack foods and vegetable and
food processing. PepsiCo's success is the result of superior products, high standards of
performance and distinctive competitive strategies.

Procter & Gamble Hygiene and Health Care Limited

Richardson Hindustan Limited (RHL), manufacturer of the Vicks range of products, was
rechristened 'Procter & Gamble India' in October 1985, following its affiliation to the 'Procter
& Gamble Company', USA. Procter & Gamble Hygiene and Health Care
Limited (PGHHCL) acquired its current name in 1998, reflecting the two key segments of its
business. P&G, USA has a 65 per cent stake in PGHHCL. The parent also has a 100 per cent
subsidiary, Procter & Gamble Home Products (PGHP). The overall portfolio of the company
includes healthcare; feminine-care; hair care and fabric care businesses. PGHH operates in
just two business segments – Vicks range of cough & cold remedies and Whisper range of
feminine hygiene. The detergent and shampoo business has been relocated globally to
Vietnam. The company imports and markets most of the products from South East Asian
countries and China, while manufacturing, marketing and export of Vicks and sanitary
napkins has been retained in India. The company reported sales of US$ 91 million in 2002-
03. The parent company has announced its plan to explore further external collaborations in
India to meet its global innovation and knowledge needs.

MARKET OPPORTUNITIES FOR INVESTMENT

Measuring the opportunity: Domestic FMCG market to treble
Source: HH Panel data
According to estimates based on China's current per capita consumption, the Indian FMCG
market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The
dominance of Indian markets by unbranded products, change in eating habits and the
increased affordability of the growing Indian population presents an opportunity to makers of
branded products, who can convert consumers to branded products.
The investment potential in rural markets
The Indian rural market with its vast size and demand base offers a huge opportunity for
investment. Rural India has a large consuming class with 41 per cent of India's middle-class
and 58 per cent of the total disposable income. With population in the rural areas set to rise to
153 million households by 2009-10 and with higher saturation in the urban markets, future
growth in the FMCG sector will come

FMCG Market Size (US$ billion)

According to estimates based on China's current per capita consumption, the Indian FMCG
market is set to treble from US$ 11.6 billion in 2003 to US$ 33.4 billion in 2015. The
dominance of Indian markets by unbranded products, change in eating habits and the
increased affordability of the growing Indian population presents an opportunity to makers of
branded products, who can convert consumers to branded products.

The investment potential in rural markets

The Indian rural market with its vast size and demand base offers a huge opportunity for
investment. Rural India has a large consuming class with 41 per cent of India's middle-class
and 58 per cent of the total disposable income. With population in the rural areas set to rise to
153 million households by 2009-10 and with higher saturation in the urban markets, future
growth in the FMCG sector will come from increased rural and small town penetration.
Technological advances such as the internet and e-commerce will aid in better logistics and
distribution in these areas. Already Indian corporate such as HLL and ITC have identified the
opportunity and have initiated projects such as 'Project Shakti' and 'e-Choupal' to first, expand
rural income, and then, to penetrate this market.

Boosting rural income - novel experiments by Indian corporates

PROJECT SHAKTI
FMCG giant Hindustan Lever initiated 'Project Shakti' to spur growth and increase the
penetration of its products in rural India while changing lives and boosting incomes. Through
a combination of micro-credit and training in enterprise management, women from self-help
groups turned direct-tohome distributors of a range of HLL products and helped the company
test hitherto unexplored rural hinterlands. The project was piloted in Nalgonda district in
Andhra Pradesh (AP) in 2001, it has since been scaled up and extended to over 5,000 villages
in 52 districts in AP, Karnataka, Gujarat, Chattisgarh, Orissa and Madhya Pradesh with
around 1,000 women entrepreneurs in its fold. The vision is to create about 11,000 Shakti
entrepreneurs covering 100,000 villages and 100 million rural consumers by 2010. For HLL,
greater penetration in rural areas is also imperative since over 50 per cent of its incomes for
several of its product categories like soaps and detergents come from rural India. The project
has borne fruit for HLL. In Andhra Pradesh, so far, since the experiment began, HLL has
seen 15 per cent incremental sales from rural Andhra, which contributes 50 per cent to overall
sales from Andhra of HLL products.

e-CHOUPAL
An example of the successful application of IT is the e-Choupal experiment kicked off by
diversified tobacco giant ITC. ITC has designed and set up internet kiosks called e-Choupals
to support its agricultural product supply chain. The e-Choupals are totally owned and set up
by ITC with the operators not having any investment or risk of their own. There are four
kinds of e-Choupals tailored for shrimps, coffee, wheat and soyabeans. The focus is on
creating internet access for global market information to guide production and supply
decisions. It provides price information and thus, price certainty to the farmers. In addition,
the farmers get access to operational information, developed by ITC experts, pertaining to
cropping, seeds, fertilisers etc. The initial benefits of the ITC effort include a substantial
reduction in transaction costs, from 8 per cent to just 2 percent. These gains are shared
roughly equally between ITC and individual farmers. The longer-term goal is to use e-
Choupals as sales points for soyabean oil and a range of other consumer goods. ITC has also
set up its first rural mall near Bhopal, where it distributes products of other FMCG majors as
well. Hence, incomes generated through e-choupals will be targeted by the FMCG major to
drive their product sales.

Export potential
India has a locational advantage that can be exploited to use it as a sourcing base for FMCG
exports. Export of pre-prepared meals with Indian vegetables for large Asian ethnic
population settled in developed countries is a very big opportunity for India. South East Asia,
which is presently being catered to by USA and EU, can be sourced from India due to its
lower freight cost. Investments can also be made in Indian dairy industries to manufacture
and package dairy food (through contract or local collaboration) for export to Middle East,
Singapore, Malaysia, Indonesia, Korea, Thailand and Hong Kong. Commodities like dry
milk, condensed milk, ghee and certain cheese varieties that are utilised as ingredients in
foreign countries can also be exported. These markets can be expanded to include value-
added ingredients like packaged cheese sauce and dehydrated cheese powders. Large export
potential also exists in the soya products industry.

Sectoral opportunities
According to the Ministry of Food Processing, with 200 million people expected to shift to
processed and packaged food by 2010, India needs around US$ 28 billion of investment to
raise foodprocessing levels by 8-10 per cent. In the personal care segment, the lower
penetration rates also presents an untapped potential. Key sectoral opportunities are
mentioned below:
• Staple: branded and unbranded: While the expenditure on mass-based, high volume, low
margin basic foods such as wheat, wheat flour and homogenised milk is expected to increase
substantially with the rise in population, there is also a market for branded staples is also
expected to emerge. Investment in branded staples is likely to rise with the popularity of
branded rice and flour among urban population.
• Dairy based products: India is the largest milk producer in the world, yet only 15 per cent of
the milk is processed. The US$ 2.4 billion organised dairy industry requires huge investment
for conversion and growth. Investment opportunities exist in value-added products like
desserts, puddings etc. The organised liquid milk business is in its infancy and also has large
long-term growth potential.
• Packaged food: Only about 8-10 per cent of output is processed and consumed in packaged
form, thus highlighting the huge potential for expansion of this industry. Currently, the semi
processed and ready to eat packaged food segment has a size of over US$ 70 billion and is
growing at 15 per cent per annum. Growth of dual income households, where both spouses
are earning, has given rise to demand for instant foods, especially in urban areas. Increased
health consciousness and abundant production of quality soyabean also indicates a growing
demand for soya food segment.
• Personal care and hygiene: The oral care industry, especially toothpastes, remains under
penetrated in India with penetration rates below 45 per cent. With rise in per capita incomes
and awareness of oral hygiene, the growth potential is huge. Lower price and smaller packs
are also likely to drive potential uptrading. In the personal care segment, according to
forecasts made by the Centre for Industrial and Economic Research (CIER), detergent
demand is likely to rise to 4,180, 000 metric tonnes by 2011-12 with an annual growth rate of
7 per cent between 2006 and 2012. The demand for toilet soap is expected to grow at an
annual rate of 4 per cent between 2006-12 to 870,000 metric tonnes by 2011-12.Rapid
urbanisation is expected to propel the demand for cosmetics to 100,000 metric tonnes by
2011-12, with an annual growth rate of 10 per cent.
• Beverages: The US$ 2 billion Indian tea market has been growing at 1.5 to 2 per cent
annually and is likely to see a further rise as Indian consumers convert from loose tea to
branded tea products. In the aerated drinks segment, the per capita consumption of soft drinks
in India is 6 bottles compared to Pakistan's 17 bottles, Sri Lanka's 21, Thailand's 73, the
Philippines 173 and Mexico's 605. The demand for soft drink in India is expected to grow at
an annual rate of 10 per cent per annum between 2006-12 with demand at 805 million cases
by 2011-12. Per capita coffee consumption in India is being promoted by the coffee chains
and by the emergence of instant cold coffee. According to CIER, demand for coffee is
expected to rise to 535,000 metric tonnes by 2012, with an annual growth rate of 5 per cent
between 2006-12.
• Edible oil: The demand for edible oil in India, according to CIER, is expected to rise to 21
million tonnes by 2011-12 with an annual growth rate of 7 per cent per annum.
• Confectionary: The explosion of the young age population in India will trigger a spurt in
confectionary products. In the long run the industry is slated to grow at 8 to 10 per cent
annually to 870,000 metric tonnes by 2011-12.
Concluding Remarks
The FDI debate has opened up many issues which deserve proper attention of the policy
makers before the retail sector is opened up to foreign investors. The findings and
deliberations in this paper reveal that unlike in other sectors, FDI in retail will have a much
wider impact on the economy. Essentially, organized global retail chains will break the
traditional symbiotic relationship that exists between small producers and small retailers.
Also, in the new retailing format, due to unequal terms of trade in a monopoly like situation,
small producers and suppliers are likely to suffer most.
Also it is necessary to ensure that no giant pipeline of cheap manufactured goods
suddenly disgorges its products to the detriment of the Indian manufacturer thus causing
extreme social disruption. Therefore our policy should be to ensure that there is no foreign
exchange outgo from the first year. The total value of imports to be retailed and the total
value of exports to be retailed should match (not taking capital inflows) every year. We
cannot approve of a situation where there are vast imports from the network of thousands of
manufacturing sweatshops in China for five years while the Indian suppliers are being
developed for later supplies and set off. If FDI in Retail is to be permitted, it should be made
foreign exchange neutral for each year, at least for the first ten years.
As in the Thai model where no large markets are permitted within 15 km of the city center
– all our metros should have a locational limitation. It will be better to follow the Chinese
model of caution and hurrying slowly. China just allowed FDI in retail in 1992 and the cap
was at 26%. After 10 years the cap was raised to 49% when local chains had sufficiently
entrenched themselves. 100% FDI in retail was permitted only in 2004, after the infant
retailing industry had acquired some muscle. Even in as liberal an economy as Japan, large-
scale retail location law of 2000 stringently regulates factors such as garbage removal,
parking, noise and traffic. Recently Carrefour decided to exit Japan by selling off its eight
struggling outlets after four years to the Japanese Aeon Co as the extremely cumbersome
Japanese regulations blatantly favor its own homegrown retail firms. Malaysia’s Bumiputra
clause insists No FDI in Retail 29
that 30% of equity is held by indigenous Malayans. Philippines insist that 30% of inventory
by value be grown within the country.
In order to prevent such drawbacks, the government can adopt certain measures to
strengthen the domestic unorganized retail sector. Few suggestions are:
1. The retail sector in India is severely constrained by limited availability of bank finance.
The Government and RBI need to evolve suitable lending policies that will enable retailers in
the unorganised sectors to expand and improve efficiencies.
2. A National Commission must be established to study the problems of the retail sector and
to evolve policies that will enable it to cope with FDI – as and when it comes. The proposed
National Commission should evolve a clear set of conditionalities on foreign retailers on the
procurement of farm produce, domestically manufactured merchandise and imported goods.
These conditionalities must be aimed at encouraging the purchase of goods in the domestic
market. Conditionalities must also state the minimum space, size and specify details like,
construction and storage standards, the ratio of floor space to parking space etc. Giant
shopping centres must not add to our existing urban snarl.
3. Entry of foreign players must be gradual and with social safeguards so that the effects of
the labour dislocation can be analyzed & policy fine-tuned. Initially allow them to set up
supermarkets of a specified size only in the metros to make the costs of entry high and
according to specific norms and regulations, so that the retailer cannot immediately indulge in
‘predatory’ pricing.
4. In order to address the dislocation issue, it becomes imperative to develop and improve the
manufacturing sector in India. There has been a substantial fall in employment by the
manufacturing sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its No
FDI in Retail 30
contribution to the GDP has grown at an average rate of only 3.7%.23 If this sector is given
due attention, and allowed to take wings, then it could be a source of great compensation to
the displaced workforce from the retail industry.
5. The government must actively encourage setting up of co-operative stores to procure and
stock their consumer goods and commodities from small producers. This will address the
dual problem of limited promotion and marketing ability, as well as market penetration for
the retailer. The government can also facilitate the setting up of warehousing units and cold
chains, thereby lowering the capital costs for the small retailers.
6. According to IndiaInfoline.com, agro products and food processing sector in India is
responsible for $69.4 billion out of the total $180 billion retail sector (these are 2001 figures).
This is more than just a sizeable portion of the pie and what makes it even more significant is
the fact that in this segment, returns are likely to be much higher for any retailer. Prices for
perishable goods like vegetables, fruits, etc. are not fixed (as opposed to, say, branded
textiles) and therefore, this is where economies of scale are likely to kick in and benefit the
consumer in the form of lower prices. But due attention must be given to the producer too.
Often the producer loses out, for example, when the goods are procured at Rs.2 and
ultimately sold to the consumer at about Rs.15 as in the case of tomatoes now. The
Government themselves can tap into the opportunities of this segment, rather than letting it be
lost to foreign players. And by doing so, they can more directly ensure the welfare of
producers and the interest of the consumers.
7. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that
procurement prices for perishable commodities are fair to farmers and that they are not
distorted with relation to market prices.