Retail Sector and Foreign Direct Investment in India Essay
Indian retail sector is highly fragmented and one of the most vibrant and rapidly growing industries with several players entering the market. The Indian retail sector is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, like corporate-backed hypermarkets and retail chains and also the privately owned large retail businesses. Unorganised retailing on the other hand refers to the traditional low-cost retailing, like the small local kirana shops and owner manned general store. This shows a great potential for the organised retail industry to prosper in India, as the market for the final consumption in India is very large.
Retail trade is largely in the hands of private independent owners and distributor’s for fast moving consumer goods consisting of multiple layers such as carrying and forwarding agents, distributors, stockiest, wholesalers and retailers. Thus, the growth potential for the organised retailer is enormous. In the next 2-3 years, India will finally see operations of a number of very serious international players- inspite of restrictions on 100% FDI in retail. The total concept and idea of shopping has undergone a sea change in terms of consumer buying behavior, ushering in a revolution in shopping in India.
The India Retail Industry is the largest among all the industries, accounting for over 10 percent of the country GDP and around 8 per cent of the employment $17 billion by 2010 and is expected to grow by 25 per cent annually. Modern retail sector in India could be worth US$ 175-200 billion by 2016 (ASSCHAM). The future of the India Retail sector looks promising with the growing of the market, with the government policies becoming more favorable and the emerging technologies facilitating operations. The India retail sector is gradually moving towards becoming the next booming industry in coming years. The purpose of this paper is to understand the imperativeness of Indian retail sector in the growth of Indian economy.
India is the country having the most unorganised retail market. Retailing in India is witnessed to the boom in terms of modern retailing formats, shopping malls etc. The future of retailing for any product across the country will definitely be in hypermarket and malls, where the consumer can get range of quality products and ambience. However, inspite of continuous deliberation, recently Government has allowed up to 51% FDI in single brand retailing by foreign companies like Reebok and Louis Vuiton.
As of now, single brand retailers operate through the franchisee route and there is a strong view that FDI in this segment would not displace jobs or impact the local industry but help create employment. Even today, the Government in budget 2010 is undecided about the level FDI in retail, but a number of foreign players, including the Wal-mart stores, Inc., have entered India in a big way. At present Wall-mart is operating through its subsidiary in Bangalore in the process of setting up offices in New Delhi and Mumbai. Learn how IKEA has essentially changed the way
The emergence of new modern retail in India has attracted attention in recent years. Joseph, Mathew et.al (2008) has carried an extensive study on the impact of organised retailing on unorganised sector. The consulting firm KSA Technopak has organized retail summits in major metros which have witnessed participation from major domestic and international retailers.
Indian retailing is undergoing a process of evolution and is poised to undergo dramatic transformation. Sreejith .A (2007) opines a verbal picture of the impending retail boom likely to happen sooner than later. The signs are all over the place. Mulky, Avinash et.al (2003) writes that modernization of retailing in India would be influenced by some important factors which includes economic development, improvements in civic situation, changes in consumer needs, attitudes and behaviour, changes in government policies, increased investment in retailing and rise in the power of organized retail. The development of modern retail will have several implications for managerial practice in manufacturing firms.
Dipankar Dey of ICFAI Kolkata deliberates in his paper that unlike in other sectors, FDI in retail will have a much wider impact on the economy. Essentially, organised global retail chains will break the traditional symbolic relationship that exists between small producers and small retailers. The corner grocer or the kirana store is a key element in the retail in India due to the housewife’s unwillingness to go long distances for purchasing daily needs. An empirical study was carried out by Sinha et al (2002) to identify factors that influenced consumers’ choice of a store.
In one of the Report on Indian retail industry by Corporate Catalyst India says, industry is facing a severe shortage of talented professionals, especially at the middle-management level. Government restrictions on the FDI are leading to an absence of foreign players resulting into limited exposure to best practices. Dr.Balyan R.K et.al (www.fibre2fashion.com) writes, FDI has positive and negative effects on India economy, but in nutshell FDI should be encouraged with strict, feasible and mutually beneficial regulations.
Shopping in India would witness a change with a simultaneous change in the buying behavior of the Indian shoppers. The whole format of shopping would also see a transformation. Multi storemalls, large shopping centre’s, format stores, and new shopping complexes with provides shopping, entertainment, and food; all under one roof will change the destiny of the retail industry (www.fibre2fashion.com). Modernisation in retail formats is likely to happen quicker in categories like dry groceries, electronics, men’s apparel, books, music. Some reshaping and adaptation my also happen in fresh groceries, women’s apparel, fast food, and personal care products (Fernandes et al, 2000). Because of their small size, Indian retailers have very little bargaining power with manufacturers and perform only a few of the flows in marketing channels unlike in the case of retailers in developed countries, Sarma, (2000).
Dr.Dhanabhakyam of Bharathair University (www.fibre2fasion.com) has studied on the growth of retail sector in India, strategies, strength and opportunities of retail stores, retail format in India, recent trends, and opportunities and challenges. This paper concludes with the likely impact of the entry of global players into the Indian retailing industry. It also highlights the challenges faced by the industry in near future.
Modern stores tend to be larger, carry more stock keeping units have a self service format and an experiential ambience. Modern formats also tend to have higher levels of sales per unit of space, stock turnover and gross margin but lower levels of net margin as compared to traditional formats (Radhakrishnan, 2003).
These reports and research activities, has given a good deal of information of what is happening in Indian retail sector. However, Indian retail sector has received inadequate attention by way of academic research with the few articles in academic journals and very few case studies.
Foreign Direct Investment & Retail Sector in India
A strong foreign direct investment presence in any sector is not only to boost, but also act as a driving force in attracting FDI in upstream activities as well. The major attraction to the foreigners lies in growth and development of a particular industry. Global Retail Development Index (GRDI) represents countrywide yearly growth and development in retail sector. The international consulting firm, A.T.Kearney, annually ranks emerging market economies based on more than 25 macroeconomic and retail-specific variables through their GRDI. For three consecutive years 2005, 2006, 2007, India has been ranked as number one, which indicates that the India is the most attractive market for the global retailers to enter (Joseph Mathew, 2008). According to AT Kearney’s Global Retail Development Index 2006 Index includes top 20 countries as per their growth.
India is ranked first with the score of 92 among twenty countries in terms of retail growth followed by Russia and china in 2007 which was ranked 2nd in 2004 after Russia, which clearly shows India on top of emerging retail markets with highest potential with Rank 1 and GFDI score of 100. In early 1995, the growth of Indian retail sector was at very infant stage. China was ahead of India in the development. Other countries came to race looking at the increase in growth trend of India and China. In 2003 all the countries entered in peaking of the industry in which again China was ahead followed by Hungary, India and Ukraine and Vietnam.
In 2006 China started declining followed by Ukraine. Russia was very nearer to attain maturity stage. India has attained maximum growth by 2006 and still growing at a higher pace as per analysis of 2007. This is basic reason behind India becoming a major destiny for foreign direct investment. Other factors like economic growth in terms of greater disposable incomes (especially in middle class) currently comprise 22% of the total population and expected to increase to 32% by 2010.
Disposable incomes are expected to increase at an average of 8.5% per annum till 2015. Demographics segment which constitutes more than 50% of the population is less than 25 years of age and strong growth is expected to continue in this age group and expected to increase from 28% to 40% of the total population by 2020 which is one other reason for attracting FDI. Major impact of FDI is projected mainly on unorganised retail sector which consists of 97% share in total retail sales. India is primarily houses the traditional system of retailing. It is imperative to notice that, Indian retail is highly fragmented, with about 11 million outlets operating in the country and only 4% of them being larger than 500 square feet in size.
Compared to just 0.9 million in the US, yet catering to more than 13 times of the Indian retail market size. According to the global consultancy firms AC Neilsen and KSA Technopak, India has the highest shop density in the world. In 2001 they estimated there were 11 outlets for every 1,000 people. The organised retail sector is expected to see an investment of over $30 billion within the next 4-5 years, catapulting modern retail in the country to $175-200 billion by 2016, according to Technopak estimates. Organised retailing is primarily concentrated on urban. Its share as represented in urban areas is estimated to be 12 – 20% growing at more than 30%. Thus organised sector is deriving the retail growth in India and contributes significantly to the growth of economy. FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provides the sector specific guidelines for FDI with regards to the conduct of trading activities. a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. b) FDI up to 50% with prior Government approval (i.e., FIPB) for retail tradeoff Single Brand products. c) FDI is not permitted in Multi Brand Retailing in India. Prospected Changes in FDI Policy for Retail Sector in India
The government (led by Dr. Manmohan Singh) announced following prospective reforms in Indian Retail Sector 1. Indian will allow FDI of up to 51 % in – multi – brand sector. 2. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. 3. The retailers (both single and multi – brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers. 4. All retail stores can open up their operation in population having over 1 million. Out of approximately 7935 towns and cities in India, 55 suffice such criteria. 5. Multi – brand retailers must bring minimum investment of US$ 100 million. Half of this must be invested in back-end infrastructure facilities such as cold chains , refrigeration , transportation, packing etc. to reduce post- harvest losses and provide remunerative prices to farmers. 6. The opening of retail competition (policy) will be within parameters of state laws and regulations. FDI in Single –Brand Retail
The Government has not categorically defined the meaning of – Single Brand any where neither in any of its circulars nor any notifications. In Single – brand retail, FDI up to 51 percent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3.
a) Only single brand products would be sold ( i.e., retail of goods of multi – brand even if produced by the same manufacturer would not be allowed ) b) Produced should be sold under the same brand internationally c) Single – brand product retail would only cover products which are branded during manufacturing d) Any addition to product categories to be sold under single-brand would require fresh approval from the Government. While the phrase single brand has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a single brand, viz., Reebok, Nokia and Adidas.
Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed. FDI in Single brand retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brands and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets. FDI in Multi-Brand Retail
The Government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. In circulated a discussion paper  on allowing FDI in multi – brand retail. The paper doesn’t global retail giants to enter and establish their footprints on the retail landscape of the India. Opening up FDI in multi- brand retail will mean that global retailers including Wall- Mart, Carrrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ‘Kirana’ store. Trends Favouring Indian Retail Sector
It is expected that the middle class and the higher middle class with annual household income of above Rs. 90,000 will rise from about 336 million in 2005-06 to 505 million in 2009-10. This shows a remarkable growth potential of retail sector in the country. The sales of the Indian retail sector have been about US$ 322 billion (Rs. 14,574 billion) in 2006-07, amounting to about 35% of the Indian GDP and stands seventh largest retail market in the world. Indian retail sector is expected to grow to about US$ 590 billion by 2011-12 and further to over US$ 1 trillion by 2016-17 (Technopak).
This works out to an annual growth rate of about 13% during 2007-12 and a slower 11% during 2012-17. The emergence of organized retail has been a recent phenomenon in the country, starting in the late 1990s. Its growth till 2006-07 was reasonably fast; at nearly 20% per annum during the past three years, compared to unorganized retail grew by 11 % per annum. Looking at the pace in which the organized retail has accelerated its growth in 2007-08 is expected to meet further momentum during the coming years (Joseph Mathew, et.al, 2008). Earlier the Indian organized retail market was either dominated by the apparel brands or regional retail chains. However, the scenario has changed dramatically.
This particular sector has attracted not only the large Indian corporate giants, but also large global players as well. It is estimated to approximately US$ 35 billion are being planned for the next five years. Of this, about 70 % is expected to come from players including Reliance Industries, Aditya Birla Group, Bharti-Wal-Mart, Future Group and others. It is also estimated that about 40 % of the total investments will be contributed by foreign investors including Wal-Mart, Metro, and Auchan, Tesco and many others, signifying the imperativeness that the international retail community is attaching to the Indian retail opportunity.
In simple words, India is striving to achieve in a short span of time. Indian retail sector is in the verge of bypassing many stages of evolution of modern retail sector compared to major global players which took almost 25-30 years. It is expected that India is likely to see the emergence of several new and innovative India-specific retail business models during the coming years. Retail sector has seen a paradigm shift over the past decade that its very definition has undergone a dramatic change. The time has gone that the manufacturer rely on sales to take place by ensuring mere availability of manufactured good. Retailing has gone far beyond its reach and has changed from selling a product or a service to selling an expectation, an experience that a consumer would like to do again and again.