Title: Phoenix of Retail Sector in India and scope of FDI in Retail .
Authors:
C.A. Neha Saxena
H.L. Institute of Commerce, Ahmedabad University
E-mail: [email protected] mobile:9979503786
Swati Saxena
Independent Researcher
E-mail: [email protected] mobile:9904131066
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Abstract:
The retail sector in India is enjoying a tremendous growth, with the organised retail sector catching up the pace at a faster rate. The effect of the
alteration of the changing face of the Indian retail sector has changed the life of consumers in India. Metamorphing, this article sensitises the larval stage
of the retail sector due to an escalation of investment in the retail sector in India. The country, India with a strong fundamental and growth potential,
increased consumerism and urbanisation has given immense scope for retail growth and foreign players emerging as a major player. Opening up and
widening of several important sectors like infrastructure, townships, housing, cash and carry trading, wholesale trading, E-Commerce, single brand retail,
commodity exchanges etc. have further spurred the interest in India as the FDI capital of world. More interest is being shown in retail sector which India
is gradually opening up. This was the first time a thought to open up FDI in multi – brand retail had seen a positive horizons. FDI should be viewed as a
tool of growth for Indian Retail segment by injecting liquidity.
Key words: Evolution of Retail Sector, Consumerism, opportunities in Indian retail sector, FD in retail.
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Electronic copy available at: http://ssrn.com/abstract=2528380
Introduction:
The retail sector in India comprises of the organised retail sector and the unorganised retail sector. The retail sector in India is enjoying a tremendous
growth, with the organised retail sector catching up the pace at a faster rate. The effect of the alteration of the changing face of the Indian retail sector has
changed the life of consumers in India. The evident increase in consumerist activity is colossal which has already chipped out a money making recess for
the retail sector of Indian economy. Globalisation as a movement of liberalisation, privatisation and globalisation of Indian economy since 1990 has
given the consumers a whiff of branded national and international products with the insertion and connection of fast growing technologies. The societal
development of consumers and availability of huge retail spaces is the advantage of liberalisation.
The contributors for the growth of retail sector are:
Increase in household consumption due to rise in per capita income
Improvement in standard of living, being the result of demographical change
Change in pattern of consumption
Availability of retail spaces and improved infrastructure facilities
Introduction of new and reformative forms of availing finance
The infrastructure in the retail sector has grown leaps and bounds. The Indian retail industry is the fifth largest retail outlet globally. It is estimated to
grow from US$ 385 billion in 2007–08 to US$ 405 billion by 2009–10 and to US$ 573 billion by the year 2012-13. The 2011 Global retail development
index revealed a dramatic change in the global economy and the way in which developing countries have been affected. India with a strong growth
fundamentals and a promising Growth of 8.7% through the year 2016; high rate of saving and investments, high labour force growth rate and increased
spending by consumers makes a favourable environment for retail sector leading to achievement of the 4rth spot in the Global retail development index.
As has been the case for several years, Indian consumers continue to urbanize, have more money to spend on non-food purchases, and have more
exposure to brands. The result is a powerful, more discerning consumer class. India's population of nearly 1.2 billion—forecast eventually to overtake
China's—also is an attractive target. Organized retail accounts for 7 percent of India's roughly $435 billion retail market and is expected to reach 20
percent by 2020. Big-box retail, in the form of hypermarkets, has gained prominence. Food accounts for 70% of Indian retail markets, but remains under
– penetrated by organised retail. Organised retail enjoys 31%share in clothing and apparels and promises a positive growth. The house segment shows a
constant growth of 20% – 30% per year, all being the outcome of the revolutionary change in urban mindset of consumers. The recession proved an
opportunity for domestic and foreign retailers to optimize their store portfolios and drive more profitable growth in India. They are now in much better
and smarter positions to take advantage of India's retail possibilities. The market is witnessing a migration from traditional retailing to modern/organised
retailing formats, with an explosive proliferation of malls and branded outlets. Modern retailing outlets in India are increasingly becoming global in
standards and are witnessing intense competition.
Traditional retail dominates food, grocery and the allied products sector, with grocery and staples largely sourced from ‗kirana' stores and push cart
vendors.
•The apparel and consumer durable verticals are the fastest-growing verticals.
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•Mobile phones, supported by the growing telecom penetration in small towns and villages, are a major retail item with the addition of 10 million to 12
million mobile phone users every month.
•The home décor sector is witnessing rapid growth with the reducing average age of Indians buying homes.
•Beauty care, home décor, books, music and gift segments are gaining traction, predominantly in the urban areas and emerging cities.
Evolution of retail; its phases;
Initiation pre 1990’s Manufacturers opened their own outlets
Conceptualisation 1990-2005 pure play retailers, technically apparel segment realised the potential of the market
Expansion 2005-2010 The commitment of huge investment from Indian Business Houses, expansion in food and general merchandise
segment, pan India expansion to top 100 cities and repositioning of by existing players
Consolidation 2010 onwards Large scale consolidation, strong and tough competition, tapping of tier -2 and tier -3 cities, 5-6 players with
a total promising revenue of more than USD 700 million and aggression from foreign players.
As per the survey research report of KPMG International, 2011, India has a competitive landscape for retail sector. Retail has five major forms i.e.
departmental stores, hyper markets, supermarkets/convenience stores, speciality store and cash & carry stores.
Departmental stores:
•Pantaloon has 48 stores
•Trent operates 40 stores
•Shoppers Stop has 30 stores
•Reliance Retail has launched Trends in this format
Hypermarkets:
•Pantaloon Retail is the leader in this format with 145 Big Bazaar stores
•Hyper CITY, Trent (Star Bazaar), Spencer’s (Spencer Hyper), Aditya Birla Retail (More.) and Reliance are other players
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Super markets/ Convenience stores :
•Aditya Birla Retail (More, 500 stores)
• Spencer’s (Daily, 188 stores)
• Reliance Fresh
• KB Fair Price Shop (123 stores)
• REI 6Ten (350 stores) are the major players in this format
Speciality stores :
•Titan Industries is one of the largest players, with 300 World of Titan, 130 Tanishq and 70 Titan Eye+ shops
•Vijay Sales, Croma, E-Zone and Viveks are into consumer electronics and Landmark, Crossword and Odyssey focus on books,
entertainment and gifts
Cash & carry stores :
•Bharti Wal-Mart started cash-and-carry outlets, with the first one being set up in Amritsar, Punjab
Key strategies adopted by retailers in India includes multiple franchisee model adopted by Pepsi and Jumbo king, collaborative model for international
products, vertical integration by Dabur and Nokia; collaboration for back – end resource sharing by Aditya Birla, future group; increasing market
research innovation by Westside and Raymond; direct sourcing arrangements by Wal-Mart; and focus on private labelling as adopted by Spencer.
Strategies adopted by Indian retailers for sales maximisation
Offering discounts
•Most retailers have advanced off-season sales from 15 days to a month
•The discounts on offer have gone up 30–40 per cent, sometimes even 50 per cent on certain products
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Lowering prices
•Certain retailers adopt ‘First Price Right’ approach. Retailers do not offer discounts under this strategy – they directly compete on the selling price by
offering a best price without any markdowns
Offering value added services
•Companies offer innovative value added services such as happy hours on shopping deals
•Offers for senior citizens, contests for students, and lottery gains are now very common
Leveraging partnerships
•In order to keep customers on shop floors for a longer time and increase conversions, retailers are now pitching to partner with manufacturers, service
providers, financial companies, etc. to create a buzz around certain product categories.
Table :1 shows the growth of retail sector in India since 1998
Year Market size US$(in
billions)
1998 201
2000 204
2002 238
2004 278
2006 321
2008 368
2010 425
Source: EIU, Euro Motors, Aranca Research
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In 2010, textiles accounted for the largest share (38.1 per cent) in Indian retail business, followed by food and grocery (11.5 per cent) and consumer
durables (9.1 per cent)
Health and beauty segment contributes the lowest of (0.8%) of total sector revenue.
Table:2
Market break
up by
revenue(2010-
Sector 2011)
Textiles 38.1
Jewellery 2.9
Watches 2.7
Footwear 9.9
Health& Beauty 0.8
Pharmaceuticals 2
Consumer Durables 9.1
Mobiles 3.4
Furnishing 6.4
Food& Grocery 11.5
Catering Services 7.3
Books , music& Gifts 2.8
Entertainment 3.1
Organised Retail Penetration (ORP) in India is low (6 per cent) compared to other countries such as the US (85 per cent)
This points towards strong growth potential for organised retail in India given near double-digit economic growth projections in the coming decades
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The following table 3 presents retail penetration across the countries in the year 2010-2011.
Country Organised retail Unorganised
(%) retail (%)
US 85 15
Taiwan 81 19
Malaysia 55 45
Thailand 40 60
Indonesia 30 70
China 20 80
India 6 94
Source: E&Y report, Aranca Research
Indian retail market is in its nascent stage; unorganised players control the market
Organised retail in India is expected to be 9 per cent of total retail market by 2015 and 20 per cent by 2020 Future of organised retail.
Table:4
Year Organised retail (%) Unorganised retail (%)
2010-2011 7 93
2015-2016 9 91
2020-2021 20 80
Source: Deloitte report, Aranca Research
Figure:4.1
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Advantage retail sector to India
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As per the Business Monitor International (BMI), India Retail Report Q3, 2010, Aranca research, the Indian retail market which is U.S.$353 billion is
expected to grow to U.S.$ 543 billion by the year 2014.
Global positioning of the Indian retail sector, Market Potential and Scope of FDIs:
The country, India with a strong fundamental and growth potential, increased consumerism and urbanisation has given immense scope for retail growth
and foreign players emerging as a major player. India with a score of 63, ranked fourth out of 30 countries surveyed in terms of global retail
development. Brand consciousness and increased spending on non – food items are one of the factors leading India to gain 6th position after china, Russia
and three Middle East Nations, as per the Global Apparel Index survey.
India with a promising market potential achieved the second position after Brazil and reached to an astonishing third position after China and Brazil in
terms of net retail sales providing a boost and attracting the investors to invest in Indian retail segment.
The finance minister in its circular 1 and 2 of 2010 a sequel of promising future for FDI in India by opening up the under mentioned areas for FDI, (i) It
is now clarified that the issue of partly paid shares and warrants to persons resident outside India is permissible with prior Government approval, (ii)
100% FDI under automatic route has been permitted for undertaking certain agriculture activities and animal husbandry, (iii) For sectors not mentioned
under sector specific policy for FDI, it has been stated that 100% FDI under automatic route will be allowed, subject to applicable laws, (iv) Earlier all
foreign investments above the limit of INR 600 crores(INR 6 billion) required approval of the Cabinet Committee of Economic Affairs (CCEA), which
has now been raised to INR 1200 crores(INR 12 billion) in order to further reduce the approval processes.
During the financial year 2010-11 (April-November), FDI equity inflow of US$ 14 billion has already been attracted by India.
The year 2010-11 had seen a spurious opening of FDI, in the service sector (financial and non-financial) has been the prominent sector staying at the top
in terms of FDI inflows standing at 21.07% of the total inflows since the year 2000. Computer software and hardware follows the list with 8.40% share
closely followed by telecommunication and housing & real estate at 8.06% and 7.53% respectively. This clearly reflects that the key sectors viz. the
service sector, IT, telecommunication and infrastructure which provide attractive profit margins to foreign investors, have attracted greater FDI inflows
and the foreign investors have a great opportunity to further participate in India’s growing economy by investing in these key sectors along with the other
strategic areas like defence, insurance, retail etc. Opening up and widening of several important sectors like infrastructure, townships, housing, cash and
carry trading, wholesale trading, E-Commerce, single brand retail, commodity exchanges etc. have further spurred the interest in India as the FDI capital
of world. More interest is being shown in retail sector which India is gradually opening up. This was the first time a thought to open up FDI in multi –
brand retail had seen a positive horizons.
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The era that has seen the FDI regulations allowing flow of FDI in India is dated back to the year 1991, to 2010 is as follows:
Year 1991 ------------------- FDI allowed upto 51% allowed under automatic route in certain priority sector
Year 1997 ------------------- FDI upto 100% allowed under automatic route for cash & carry (wholesale)
Year 2006 ------------------- FDI upto 51% allowed with prior government approval in single brand retail
Year 2008 ------------------- Government mulls the idea of 100% FDI in single brand retail and 50% in multi brand retail
Year 2010 ------------------- Governments proposes FDI in multi brand retailing; decision is likely in near future
The much talked about Bharti enterprise – Wal mart stores Inc in India as a joint venture in the wholesale segment, expecting to plan its expansion in
India through bank loans. As per the company's website, the 50:50 JV that runs wholesale stores under the Best Price Modern Wholesale brand, is
expected to open a total of 12-15 stores in India in 2012.
Last year, the company had stated that it was investing about USD 7 million per store to add 12 new wholesale stores across India by end of 2011.
As per estimates, the company's plans to add up to 15 stores this year could entail an investment of over USD 100 million. The much-talked about FDI in
multi-brand retail would come into effect in a "phased" manner, beginning from metropolitan cities, the Economic Survey 2011-12. As per the survey
report, ( FDI in multi brand retailing ) is expected to be rolled out in a phased manner with the metros capped at the lower level coupled with
incentivising the existing 'mom-and-pop' stores (kirana stores) to modernise and compete effectively with the retail shops, foreign or domestic. Inspite of
huge aggression and objection from various sectors and communities including agriculturists, service sector, and the move would address problems
relating to food inflation, low prices realised by farmers and investment gaps in post-harvest infrastructure for agricultural produce. In November last
year, the Cabinet allowed 51 per cent FDI in multi-brand retail and 100 per cent FDI in single-brand retail. Following widespread opposition, including
from its own allies, the government suspended its decision to allow 51 per cent FDI in multi-brand retail. While the decision on FDI in the multi-brand
sector has been suspended, the government has gone ahead with increasing foreign investment level in single-brand retail to 100 per cent from the earlier
51 per cent. "While agricultural marketing could improve immensely with the growth of modern retail trade, the revenue to the government could also
increase as at present the retail sector is largely unorganised and has low-tax compliance,".
The Inter-Ministerial Group (IMG) on inflation has also recommended leveraging FDI in multi-brand retail as one of the means for addressing issues
relating to high rates of food inflation and low prices realised by Indian farmers. The retail sector is experiencing exponential growth, with retail
development taking place not just in major cities, but also in Tier-II and Tier-III cities. India's growing population and urbanisation provides a huge
market for organised retail. Growing economic prosperity and transformation in consumption pattern drives retail demand. India ranks fourth among the
30 countries that were surveyed in Global Retail Development Index and ranked sixth in the 2011 Global Apparel Index. The country's franchise market
is growing at a healthy pace of over 30 per cent per annum with Tier-2 and Tier-3 cities gradually getting attracted to the network of retailers and
franchisers.
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"Franchising in India has witnessed impressive growth of around 30-35 per cent year-after-year over the last 4-5 years with an estimated turnover of $4
billion. It is helping transform good ideas into businesses. The FRO serves as a platform to identify, foster and commercialise innovative business start-
up ideas and to meet the demands of today's dynamic entrepreneurial arena." according to Gaurav Marya, President, Franchise India.
Foreign direct investment (FDI) inflows in single-brand retail trading during April 2000 to December 2011 stood at US$ 44.45 million, according
to the Department of Industrial Policy and Promotion (DIPP)
Illinois-based firm, Kitchen Holding Company LLC, which markets and distributes high-end kitchenware brands like Corelle, Corning ware and
Pyrex cutlery, has recently announced the setting up a wholly-owned subsidiary in India to be called World Kitchen (India). World Kitchen will
sell kitchenware to consumers through retail outlets and channel partners
Italian luxury major Canali has entered into a 51:49 joint venture (JV) with Genesis Luxury Fashion, which currently has distribution rights of
Canali-branded products in India. The company also plans to invest Rs 7.65 crores (US$ 1.53 million) in India. The JV company will now sell
Canali branded products in India exclusively
Germany-based Metro AG will invest an additional Rs 560 crores (US$ 112.12 million) in 2012 to set up eight wholesale stores in India to take
advantage of the growth in consumption in Asia's third-largest economy
Mukesh Ambani-controlled Reliance Brands will bring British shirt brand Thomas Pink to India, as it looks to rapidly increase its presence in the
fast-growing domestic premium-to-luxury fashion retail market
Australian bakery cafe chain Muffin Break is planning to enter into India in next two or three months and plans to open up to 40 outlets in the
next two years
With increasing disposable incomes, expansion of stores and supporting economic factors, India's retail sector is expected to grow to about US$ 900
billion by 2014, according to a report by global consultancy and research firm PricewaterhouseCoopers (PwC).
Exchange rate used: 1 INR = US$0.02003, as on March 12, 2012
(References: Media reports, Live mint, DIPP, Market research)
→With a score of 63, India ranks fourth among the surveyed 30 countries in terms of global retail development
→India’s strong growth fundamentals along with increased urbanisation and consumerism opened immense scope for retail expansion for foreign players
→Favourable demographic conditions and higher per capita disposable income of young population boosts demand for retail in India
→Consumers in India are spending more money on non food purchases. They are becoming more brand conscious
→In the Global Apparel Index survey, India was ranked sixth after China, Russia and three Middle East nations
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The Liberalisation, Privatisation and Globalisation movement popularly known as LPG movement had trade liberalisation in India been accompanied by
a gradual liberalisation process for opening up new horizons for capital flow management regulation. Foreign Exchange Management Act, 1999 and
various regulation framed under the act governs the domain of foreign direct investment by non - resident through transfer or issue of securities to person
resident outside India is a “capital account transaction”. RBI is the primary authority to regulate capital flow through FEMA regulation. Notably, Section
6 of FEMA authorises the RBI to manage foreign exchange transactions and capital flows in consultation with the Ministry of Finance. SEBI (Foreign
Institutional Investors) Regulations, 1995 (FII Regulations) have facilitated the regulation of portfolio investments and strengthened India’s opening to
world markets. Supplementing RBI and SEBI, the other institutional bodies regulating capital flows include the Forward Markets Commission (FMC),
the Insurance Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and Development Authority (PFRDA). The two routes
for foreign investments -the foreign direct investment route and foreign portfolio investment route. According to the World Investment Prospects
Accounts 2010 -2012, India was the second most favourite destinations. Comparatively India ranked at the third position as per the World Investment
Prospects Accounts 2009 -2010. Cumulative amount of FDI equity inflows from August 1991 to November 2010 in India stood at US$ 140,920 million,
as per the data released by Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry. FDI should be viewed as a
tool of growth for Indian Retail segment by injecting liquidity. Growth of retail in India will benefit the economy by increasing revenue, better standards
of living development, growth of Tier-2 & 3 cities and help in curbing food inflation in a significant way.
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References:
Business Monitor International publication, Press Releases, Media Reports, Internet and Mobile Association of India (IAMAI) data,
Department of Industrial Policy and Promotion (DIPP) statistics
CII - A.T. Kearney Report, Indian Brand Equity Foundation, November 2011.
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