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FDI cap increase in retail is a game changer

FDI cap increase in retail is a game changer

Author | Noor Fathima Warsia | Tuesday, Sep 18,2012 4:01 AM

FDI cap increase in retail is a game changer

Following various rounds of deliberations, the government of India has finally allowed 51 per cent FDI (foreign direct investment) in multi-brand retail sector. A few conditions, such as a minimum investment of USD 100 million and a required FIPB (Foreign Investment Promotion Board) nod have been introduced, but the decision overall is expected to open up the economy, especially retail, in a big way.

“The announcement definitely is positive. Increase in investments will also lead in generating job opportunities. Economic growth is on the chart. This will also boost farmers’ incomes,” said Sandip Tarkas, Chief Executive Officer, Future Media and Future Telecom, Future Group.

Govind Shrikhande, Customer Care Associate and Managing Director, Shoppers Stop Ltd, added here, “It’s great to finally have a green signal from the Government on FDI in multi-brand retail. As such, the policy fine print remains the same; but it is a good starting point. The economy should witness a sentiment revival on the brink of this announcement. Along with this decision – clarity on APMC Act, GST and availability of real estate at affordable prices can change the industry.”

Though the central government has allowed FDI, the final authorisation is to come from state governments. According to media reports, nine states and three union territories such as Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Maharashtra, Rajasthan, Uttarakhand, Jammu & Kashmir, Manipur, Daman & Diu and Dadra & Nagar Haveli have shown their support to FDI. The rest are yet to decide.

“There is a bit of a question-mark given the way the current government has announced various roll backs, but in principle the development is very positive for the economy because not only does it open up retail but a lot more would have to be created to bring in the right infrastructure and create a strong backbone in general. So, it fuels growth in many different ways,” said Pratap Bose, Chief Operating Officer, DDB Mudra Max, which recently brought international shopper marketing brand TracyLocke to India.

New avenues of growth in marketing and advertising
There are unexpected windfalls to be tapped on for the marketing and advertising industry, if the right approach is taken. “The government needs to be congratulated on its bold move. Growth in organised retail is important for growth of FMCG (Fast Moving Consumer Goods) and advertising sectors,” said Sam Balsara, Chairman, Madison World.

FDI itself has not been marketed in India. While there are luxury brands in India, they don’t have agencies here yet and most of their communication is adaptation of regional work. According to industry leaders, given some of the conditions the government has set for FDI in retail, large retail chains and luxury brands are amongst the first likely investors in the sector in India.

The development will also open up retail as an advertising category in the lines of FMCG, consumer durables and so on. Elaborating, Bose pointed out that in India, shopper marketing is largely seen as a capability that can be exploited for brands. But in markets such as the US, 60 per cent of shopper marketing spends is for retail chains and outlets such as Walmart, Carrefour, Ikea, Macy’s and the likes, making them heavy advertising spenders. The retail chains follow an organised communication calendar that has pre-planned windows, where they are advertising in order to drive a special initiative undertaken for a brand or various brands, or sales around the holidays and festivals and so on.

“You will see the market changing in the long-term on similar lines though there is still some time to go for that, since this is an evolutionary process. It still remains to be seen how all this pans out in India,” said Bose.

Benefits waiting for retailers & marketers, albeit challenges
The decision to increase FDI cap in retail to 51 per cent will also hugely benefit the current companies. While retail has been touted as the big thing for almost a decade now, it has still not taken off in India as was expected and many players are yet bleeding. For retailers in India, this is boom time. “Just like aviation, where Kingfisher is the biggest beneficiary with the increase in FDI, in a sense for Indian retailers too, this comes as a bailout package.”

It also allows them to bring in global expertise to run businesses more efficiently. Tarkas added here, “We are welcoming this reform and believe that it a step forward that will act as a value add to the industry. We would soon be looking for overseas partners who will help in bringing expertise in the retail business in India.”

“From Shoppers Stop’s standpoint, we will first do an in-depth review of the policy and ensuing clauses. Post our understanding, we will consider the need for a tie-up with an international player, especially in the mixed retail format of Hypercity,” Shrikhande added.

But there are challenges ahead too...

One side of it is the lack of political consensus that Tarkas reasserted and added, “It could delay in establishment of this reform in many parts of the country.”

Balsara believes that another key challenge would be to manage the perception issue that the ‘kirana’ store will die with this development.

The other side is for the players themselves. “When Indian retail chains that understand the consumer and the law of the land are facing problems in making money, it would be challenging for the international players to see success in the short to the medium term. Even though, the growth rates are sluggish in India at the moment, but with a GDP growth of around six per cent, it still looks like a good market for investors – their success in the long run though is difficult to predict,” said Bose.

While this is going to be one area that would see various conversations in days to come, the growth in retail will open up the sector in terms of marketing and advertising. In the current phase where business is not looking good, the development would give a fillip to the advertising industry.

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