Top Story

e4m_logo.png

Home >> Marketing >> Article

Guest Article: Retail FDI: India’s next growth booster?

15-December-2011
Font Size   16
Share
Guest Article:  Retail FDI: India’s next growth booster?

 Evalueserve believes that FDI in retail will be gradual because of the large-scale involvement of small retailers in the sector. International retailers, such as Wal-Mart, Tesco, and others need to monitor this space closely, as the potential in the Indian Retail sector is immense because of its sheer size. The market offers tremendous opportunities for all North American and European retailers and, obviously, none of them want to miss them. All retailers need to expand their portfolio and business, and the opportunities offered by India makes it an interesting topic for both strategists and board members.

Farmers, organised retailers, logistics service providers, and customers are expected to be the key beneficiaries of FDI in retail. More specifically, small and medium-sized suppliers and the Indian contract logistics industry are most likely to witness a boost. Evalueserve expects both organised and unorganised retail to coexist in India; however, with organised retail leading growth.

Will retail FDI usher in the next phase of economic liberalisation in India, or will the government’s decision to hold FDI in multi-brand retail until a consensus is reached, hold back the country’s economic prospects in the long run. Evalueserve evaluates the promise held by the retail sector and its ability to lead the next phase of India’s economic liberalisation.

The enormous opportunity offered by India’s retail sector is evident from two vital facts: it accounts for 22 per cent of India’s GDP and it is the second largest employer in the country, next only to agriculture. That the Indian government’s eventual decision to allow or disallow FDI in multi-brand retail will have a definite impact on the country’s economy is certain – whether it emphasises on broader economic growth or on safeguarding the interest of indigenous players is something that only time will tell.

As things stand now
Policy reforms are taking place in India, albeit after a few hurdles. As per estimates, unorganised retail will grow at 13 per cent per annum until 2015, while organised retail will expand at 45-50 per cent. Allowing retail FDI will definitely have an impact on smaller indigenous players and several unorganised peers. The impact can be mid-term to long-term, depending on the strategy adopted by global players.

The proposed FDI approval comes with certain restrictions, for example, retailers will have to invest a minimum of $100 million over five years, and purchase 30 per cent of their goods from small and medium-sized firms (typically local suppliers). Evalueserve believes this will boost the Indian contract logistics industry, especially the warehousing and cold-chain services. At least half of the $100-million investment has to be made to develop Indian rural infrastructure, and to establish a cold-chain system.

The organied retail sector in India has developed across regions of high population density, thus resulting in uneven representation across the country, partly due to state-level policies. In 2011, it accounted for only 7 per cent of the retail segment. Some estimates suggest that the segment will increase its contribution by up to 20 per cent by 2020. Others such as Business Monitor International, which pegged India’s retail sector at $396 billion in 2011, have opined that it will grow at an annual average rate of 25 per cent to $785 billion by 2015.

In the organised retail market, we see multi-brand retail (MBRT) and single-brand retail (SBRT) operating mainly through lifestyle and value retailing, with the former focused on category-specific lifestyle-focused products and the latter on discounts and value-for-money products.

What’s in store for international players?
The entry of large organised retailers will increase competition in the retail market and lead to a need for strategic partnerships at all levels of the value chain. Foreign players, such as Tesco and Wal-Mart, have already entered the cash-and-carry market through joint ventures, while others, such as Metro and Carrefour, have independently entered the segment.

From April 2006 to December 2010, more than 900 companies attracted FDI worth Rs 100 billion (approximately $2.2 billion) in India’s cash-and-carry sector. Organised retailers may adopt different strategies to enter and expand in a particular region, or the retail market as a whole. Evalueserve foresees the following strategic moves of such retailers:

 

 

 

 

 

 

 

 

 

 

 

 

 



Which pony will lead to the victory line?

Many industry participants believe that the Indian retail sector is likely to benefit from the FDI policy in the long run, as foreign entities will pump in investment into supply chains, increase operating efficiency, and improve its financial health. However, the resultant increase in competition will enhance the bargaining power of consumers, thereby lowering prices.

Evalueserve’s study indicates that large retailers such as Pantaloon and Shopper’s Stop are more likely to be the beneficiaries of retail FDI, as it will strengthen their balance sheet with capital infusion (lowering debt) and support their aggressive retail expansion plans. These benefits are otherwise unlikely in the near term because of cash-constrains.

On the other hand, smaller cash-strapped businesses in the retail space might be pressurised and succumb to takeover moves by larger players, as many of them are under tremendous debt pile up. Also, their attractiveness for foreign players, owing to their ability to provide a nation-wide platform, will make them suitable acquisition targets for larger foreign companies.

Evalueserve foresees the retail segment growing at an exponential rate, despite the policy reform uncertainty. This growth will be propelled by an increasing proportion of working age population, which is expected to account for 67 per cent of total population by 2020; increasing urbanisation, which will see the number of cities with a population of one million and above doubling by 2020; and rising disposable incomes, as the number of households with annual disposable incomes of $5,000–15,000 is expected to increase from 14.6 per cent in 2010 to 41.1 per cent in 2020. Evalueserve sees organised and unorganised retail co-existing in India’s retail landscape, with organised retail increasing its share over time. We will closely follow whether India’s next growth phase is led by the sector, with the entrance of foreign retailers.

(Bhavya Sehgal is the principal author of this paper. Sehgal is an Associate Vice President, Consumer Goods and Retail Practice, at Evalueserve. Vani Jain is the co-author of this paper. Jain is a Manager at Evalueserve, and leads the Consumer Goods and Retail Practice division at Evalueserve.)

Aparna Bhosle, Business Cluster Head - Premium & FTA GEC channels - ‎ZEEL, on its new property, sponsors, investment on acquisition and response to BBC First

In an interview with exchange4media, Ferzad Palia says that most successful brands are not those who spend the most money

As Milind Pathak takes over as Managing Director - Southeast Asia, Httpool, we chat with him on his new role, aspirations and his plans to aggressively penetrate the operations of the group in the Southeast Asian market

The group released the Little Hearts online-only campaign, #BreakSomeHearts, early this year and is on the path to make many more of its brands available on the digital platform

Though business has picked up, the private FM industry expects festive ad spends to be subdued compared to 2016