FROM THE ECONOMIST INTELLIGENCE UNIT
India has finally opened up its retail market to foreign investors, albeit with conditions. Foreign retailers are already poised to act.
After years of deliberation, delay and bitter political opposition, India has finally decided to open up its retail market to foreign investors. Despite several conditions it has imposed and ongoing political opposition, the government expects the move to bring in billions of dollars of foreign investment and create millions of new jobs. It will also mark a turning point for India's underdeveloped retail sector.
Foreign investors in India's retail market were already allowed to own 51% of a single-brand retail business, or 100% of a wholesale cash-and-carry chain, which can only sell to other retailers and businesses. But for years India had banned foreign direct investment (FDI) in “multi-brand retail” (stores selling multiple brands, including supermarkets). The restrictions have largely kept foreign retailers out of India, which has Asia’s third-largest retail market.
Last week, the government approved FDI of up to 51% in multi-brand retailing and raised the FDI limit in single-brand retailing to 100%. The big move has been eagerly awaited by global retailing majors, including supermarket chains such as Wal-Mart (US), Carrefour (France) and Tesco (UK), which currently operate in India as wholesalers. They are hoping that, once the retail market opens up, they will gain ground quickly among the rapidly rising middle class.
There is certainly room for growth. India’s US$1.6trn economy is still growing fast and liberalisation has improved almost every sector. Yet the retail sector remains backward, with inefficient supply chains, poor back-end infrastructure and a dominance of small shops: according to McKinsey, India has about 12m retail outlets, the world’s highest density. Although the Indian retail market is valued at around US$500bn, its sales-per-head is among Asia’s lowest and supermarkets account for just over 2% of the sector.
This highly-fragmented market is already undergoing a structural shift, with a slow move from small, family-run shops to organised retail outlets. Organised Indian retail chains have been permitted for years and major domestic players have ambitious expansion plans. So far, though, organised retail has captured less than 10% of the market, with problems including high rents, inflexible labour laws, complicated property codes, multiple licensing requirements and a shortage of skilled managerial staff. Meanwhile, small shops remain competitive, since they offer lower prices, home delivery and credit.
A few conditions
The development of big retailers, whether foreign or local, has been a tense subject politically, which is why this law has taken so long to pass. The retail sector is India’s second-largest employer, employing an estimated 33.1m people, many of whom stand to lose their livelihoods to large chains. The main opposition parties and some of the government’s own political partners have vehemently opposed retail deregulation.
Interestingly, soaring food prices and high inflation may have helped the government to finally pick up this political hot potato. India is currently the world’s largest milk producer, second-largest fruit and vegetable producer and third-largest grain producer. However, only some 5% of its produce is processed and up to 40% of its fruits and vegetables perish through spoilage, because of poor cold storage facilities and inefficient transport. The consequent high food prices, along with high global commodity prices, have kept India’s inflation above 9% for the past 11 months, the highest among major Asian economies.
Foreign retailers argue that big supermarket chains will introduce modern cold chain, processing and supply chain technology, cut wastage and thus increase supply and lower prices in the medium term, cooling inflation. They will also bring in big investments, upgrade related industries such as transportation and provide direct and indirect employment in sectors such as food processing, packaging and transport as well as in their own companies.
The government hopes that its latest deregulation will create 10m jobs in the next three years. The central bank said that the move will help growth and control inflation and said that raising agricultural production and productivity is important for containing price pressures, raising rural incomes and ensuring inclusive growth.
But critics remain unconvinced. To manage their concerns, the government has imposed several conditions to the deregulation. It has set a minimum investment of US$100m by foreign retailers, at least half of which must be invested in back-end infrastructure, such as warehousing and cold-storage facilities that will modernise India’s food infrastructure.
Moreover, to protect small companies and safeguard employment, retailers must source 30% of their manufactured and processed goods from small industries (those with a total plant and machinery investment of under Rp10m, or around US$200,000). This could deter some types of retailers such as electronics stores, from entering. To prevent big chains from cornering food supply, the government has reserved the first right to procure food produce from farmers, to stock its various food subsidy schemes.
To ensure a calibrated opening up of the retail sector, foreign retailers will only be allowed to set up shop in cities with a population of more than 1m at first. Individual states still hold the power to grant trade licences, so they are free to prevent foreign retailers from entering. Of the 53 cities with a population of over 1m, 28 cities in 11 major states are ruled by political parties that continue to strongly oppose the deregulation, given their voter base of small shopkeepers and traders. So foreign retailers may still be kept out of these cities, which include large ones like Bangalore, Kolkata and Ahmedabad.
Ready to leap
Despite these hurdles, plenty of foreign retailers remain eager to enter and many are already well-prepared. For example, in 2007, Wal-Mart (US) set up a joint venture, Bharti Wal-Mart, with the huge local conglomerate Bharti Enterprises. Bharti Walmart has 17 wholesale stores under the Best Price Modern Wholesale banner in India. Wal-Mart also provides support including logistics and private label sourcing for Bharti’s retail operations, consisting of 170 Bharti Retail stores.
Similarly, Tesco continues to provide back-end support for its local partners, after plans for its first cash-and-carry store in Karnataka were turned down by local authorities. Striking relationships with domestic retailers has enabled Wal-Mart and Tesco to benefit from local knowledge and to introduce their own brands to Indian consumers. Bharti and Wal-Mart have already begun discussing a joint venture in front-end retail.
Other foreign players may be more cautious initially. Carrefour (France), the world’s second-largest retailer has a wholly-owned cash-and-carry store in Delhi under the Carrefour Wholesale Cash & Carry banner with over 10,000 products and plans to open a second one shortly. Carrefour says it will continue to focus on the cash-and-carry business, as will Metro (Germany), the world’s fourth-largest retailer, which entered India in 2003 and currently has eight wholesale stores here. Metro says it has no plans to introduce its Real hypermarkets or Media Markt and Saturn consumer electronics chains in India.
Indian retailers like the Future Group, Pantaloon Retail (India), Shopper's Stop and the Tata Group’s Trent are now likely to be in demand for partnerships, given their existing operations and local knowledge. They will benefit from much-needed capital and international expertise, since many Indian chains are cash-starved even as they are expanding rapidly.
Many had already begun talks in anticipation of the deregulation. The local Videocon group is in talks with electronics chain Best Buy (US) for a joint venture for its electronic retailing chain, Next Retail, which has over 600 stores. The local Sanjiv Goenka group, which runs more than 200 of its own hypermarkets and 21 Au Bon Pain franchise cafes, says it is looking for a foreign partner for its stores and may also convert its franchisee agreement with Au Bon Pain (US) into a joint venture.
Deregulating the retail sector is a politically brave move for the Congress government, since its party must contest five state elections next year. It was met with vehement protests that forced parliament to close and further protests are inevitable. However, the government seems determined to go ahead with its move. If it succeeds, India’s retail landscape will be changed forever.
Friday, 2 December 2011
ΨCSuiteMentor© ØMSME ⊕Startup ΘEnterpriseMentor ϖProBonoAdvisor βPolicy φPolitics ⊕Strategy ∅Thinker ϕArtist| Educator| |Advisor | Ex Censor | Excellence Assessor | Startup and C-Suite MentorEx MNC Director Startup and C-Suite Mentor
"A good laugh is sunshine in the house." via Quote of the Day http://ift.tt/2hwnrBq Charles Caleb Colton "The p...
"It is now life and not art that requires the willing suspension of disbelief." via Art Quote of the Day http://ift.tt/2mWA21...