FDI in Retail:

An Analysis
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12/10/12 Retail Sector in India Some Factual Data

Retail Industry : one of the pillar of Indian Economy 15% of GDP More than $550 billion market Main Strength is Indias Population 96% of owner manned stores, 4% of large convenience stores India's retail and logistics industry, organized and unorganized in combination, employs about

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12/10/12 RETAIL SECTOR CONDITION AFTER 1991

Post liberalization, open market economic policies were adopted. FDI encouraged in various sectors including the Retail Sector. Retail trading is prohibited except for single-brand retailing. In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed . 51 percent investment in a single brand retail outlet

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Mandatory Conditions

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The minimum investment required for entering the sector should be $100million. 50 % of investment should be set aside for building backend infrastructure such as cold storage chains and warehouse. At least 30% of their requirements must be met from Indian SMEs. Can only be in the city of minimum population of 1 million.

Mandatory Procurement of Products 12/10/12 from Small Scale Sectors:

At least 30% of the procurement of manufactured / processed products shall be sourced from 'small industries' which have a total investment in plant &

Supply Chain Infrastructure12/10/12 & Distribution System

Current pathetic condition of supply side channels of the existing un/organized retail industry as well as Government-run Public Distribution System.. This is an important factor contributing to spiraling inflation..

Public Distribution System (PDS) is 12/10/12 almost defunct.. With grains rotting away / eaten by mice..

Expectations from Industry

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Indian retail industry and food processing industries welcomes FDI policy. Industry Specialist prefer step by step approach. Disparity of penetration in urban and rural India.

Metros: 20 to 25% Pan-India: 4%

Public/Consumer Expectation
Positive

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Operational Efficiencies Better quality Best Deal True Globalization

Negative

Confusion about effect of FDI on employment.

Current Developments-1

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DLF in partnership with Claires has plans to open 75 retail stores in next 5 years. French retail chain, Carrefour is about to finalise lease deals across 10 to 12 sites in the country to open cash-and-carry (wholesale) outlets. GSK Consumer Healthcare (GSKCH) has made a debut into Indian breakfast cereal market by launching oats cereal under its flagship brand Horlicks'.

Current Developmets-2

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US FMCG giant McCormick, in joint venture with Indian basmati rice brand Kohinoor Foods, intends to tap Indian packaged food industry and achieve sales of US$ 85 million in the first year of operations in the country Oral and dental hygiene products manufacturer Colgate Palmolive has decided to invest Rs 200 crore (US$ 38.52 million) to establish a greenfield facility at an upcoming industrial estate in Sanand which is being developed by state-run Gujarat Industrial Development

Suspend of Policy

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Subject of fierce opposition from several political parties in India, many of which were pushing strongly for a reversal of the proposal, primarily to protect producers and the "kirana" store industry. Monopolistic and predatory pricing strategies of large retailers. On December 7, 2011, the Indian government announced the suspension of those proposals until a further consensus is built domestically

STRENGTHS
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Economic growth- A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India. Employees get exposure to globally valued skills.

Reduction in inflation- With the inflow of foreign capital , production in the country has increased production ensures stable prices, even if demand increases.

Linkages and spillover to domestic firms- The maximum amount of the profits gained by the foreign firms

12/10/12 Integration into global economy - A developing country like India, which invites FDI, can gain a greater foothold in the world economy by getting access to a wider global market.

Increased competition - Companies will also have to improve their processes and products in order to stay competitive in the market. Overall, FDI improves the quality of a products and processes in a particular sector.

Helpful export Promotion- many foreign companies are allowed to install their units in India, on the condition that they would export certain percentage of their production. Foreign capital has therefore been instrumental in promoting exports.

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Availability of risk capital- private entrepreneurs do not like to invest in basic industries and new ventures where the elements of risk is great.FDI serves as venture capital and thus make up this deficiency. As the result of foreign capital, development has taken place in basic industries and risky ventures like iron and steel, coal, oil exploration, energy generation etc. the foreign capital has borne the pioneering risk.

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Opportunities

Expected to create 10 million 12/10/12 in 5 jobs years. Reduce wastage of farm produce to less than half. Farmers will be paid more as middlemen could be removed. Indian Retail giants can get rid of their debts. There will be greater choice for Indian consumers. Investments and improvement supply chains and warehousing. in the

Provide better value to end consumers. 12/10/12 Franchising opportunities entrepreneurs. Increased efficiency. Cost reduction in areas such as R&D, production, and distribution. Fill gaps in a companys product lines in a global industry. Gain a foothold in a new geographic market for local

Retail Sector poised for phenomenal growth

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WEAKNESS

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Weakness-1

Approval of states. Kirana stores Vs Retail giants- who wins is anyones guess. Promise of employment proved false.

Walmart, worth USD 400 billion i.e. equal to the business of entire Indian retail market, employs only 2.1 million people worldwide. Its coming to India will pose a direct threat to the 40 million Indians who are employed in retail sector.

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WEAKNESS-2

The argument that foreign players will improve the supply chain for farm produce is bogus. They are only required to create storage facilities and cold chains. Comparison between India and China is misplaced. Examples of Thailand- Big companies have seen growth of 40%

Other countries Indonesia and Malaysia have established zones within which these foreigners can do trade. In Japan Big companies have to discuss with small traders. There is Zoning system also. Hence these companies have to establish their shops outside city limits

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Threats

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Threats -1

Rent for retail space will go up. Global retail giants will resort to predatory pricing to create monopoly/oligopoly. The companies will sell internationally procured products. Domestic Industry will suffer. Mass unemployment will widen the gap between the haves and have not's. Once established these retail giants will become a power house in itself and affect the economic structure of the country.

Threats -2

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Fragmented markets and Consolidated markets. International retail does not create additional markets, it merely displaces existing markets. Between 1970-80 in Europe about 4 lakhs Retail shops were closed. Competition shall be limited to Big Retail Houses Chain of retail outlets- with a shop in each area the retail small shopkeepers will be put to heavy loss. Big fish eating small fish. Slowly the local shops will start closing down.

In countries where they have established their market share is

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Name of Country % of Market Share America 80% England 80% Western Europe 70% Brazil 40% Thailand 40% Korea 35% China 20% Malaysia 20% India 3%

CONCLUSION

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Retailing in India is one of the pillars of its economy, a sector which employs 40 million Indians (3.3% of Indian population). Pros and cons of FDI in retail to be weighed wisely Common man and not the retailing giants to be the primary beneficiaries Retail Sector will shape India's future