Publish Your Paper Now “FDI in India’s Multi Brand Retail Sector”: How to Get Ready for the Big Play FDI in India’s Multi Brand Retail Sector Introduction Retailing is one of the most active and attractive sector of the decade. In the recent past it has witnessed a large number of big players like Reliance, Tata, Pantaloon, Birla etc leaping into it. Emergence of organized retail sector in India has more to do with increasing purchasing power of buyers and modern supply and logistic management techniques. This has created an immediate necessity for a revolution in marketing strategies and innovations in retail sector. It is a known fact in today’s marketing scenario that it is easy and cost efficient to maintain existing customers than to attract new customers. The Government’s decision to allow foreign investors to open single brand retail stores would stimulate multiple effects and stimulate mall culture. Single brand retail having received 51% FDI investment sanction would improve investment scenario of the country. This in turn will lead tough competition in Indian retail sector and hence the need for innovative marketing strategies. Retailing is the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. A retailer is one who stocks the producer’s goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. AT Kearney, the well-known international management consultancy, recently identified India as the ‘second most attractive retail destination’ globally from among thirty emergent markets. It has made India the cause of
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Publish Your Paper Now “FDI in India’s Multi Brand Retail Sector”: How to Get Ready for the Big Play
FDI in India’s Multi Brand Retail Sector Introduction
Retailing is one of the most active and attractive sector of the decade. In the recent past it has
witnessed a large number of big players like Reliance, Tata, Pantaloon, Birla etc leaping into it.
Emergence of organized retail sector in India has more to do with increasing purchasing power of
buyers and modern supply and logistic management techniques. This has created an immediate
necessity for a revolution in marketing strategies and innovations in retail sector. It is a known fact in
today’s marketing scenario that it is easy and cost efficient to maintain existing customers than to
attract new customers. The Government’s decision to allow foreign investors to open single brand
retail stores would stimulate multiple effects and stimulate mall culture. Single brand retail having
received 51% FDI investment sanction would improve investment scenario of the country. This in turn
will lead tough competition in Indian retail sector and hence the need for innovative marketing
strategies.
Retailing is the interface between the producer and the individual consumer buying for personal
consumption. This excludes direct interface between the manufacturer and institutional buyers such as
the government and other bulk customers. A retailer is one who stocks the producer’s goods and is
involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the
last link that connects the individual consumer with the manufacturing and distribution chain.
AT Kearney, the well-known international management consultancy, recently identified India as the
‘second most attractive retail destination’ globally from among thirty emergent markets. It has made
India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a
contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture
employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.
FDI in India’s Multi Brand Retail Sector
Indian Retail Sector: An Over View
A study conducted by ICRIER on Indian retail industry estimates that the total retail business in India
will grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12. The
unorganized retail sector is expected to grow at approximately 10 per cent per annum with sales rising
from US$ 309 billion in 2006-07 to US$ 496 billion. Organized retail, which constituted a low four per
cent of total retail in 2006-07, is estimated to grow at 45-50 per cent per annum and attain a 16 per
cent share of total retail by 2011-12. In short, both unorganized and organized retail are bound not
only to coexist but also achieve rapid and sustained growth in the coming years. This is clearly not a
case of a zero sum game as both organized and unorganized retail will see a massive scaling up of
their activities.
http://www.planetretail.net/Reports/ReportDetails?catalogueID=61069
FDI in India’s Multi Brand Retail Sector
From the above table it is clear that Indian organized retail sector is far behind when compared to
other developed and developing nation and hence there is always a huge scope for growth.
Main Reasons why Indian retail sector is booming?
Changing age profile: India is witnessing a change in the age and income profiles of its over 1 billion
population, which is likely to fuel accelerated consumption in the years to come. The country is
believed to have an average age of 24 years for its population as against 36 years for the USA and 30
years for China. A younger population tends to have higher aspirations and spends more as it enters
the earning phase.
Disintegration of joint family: Besides, the gradual disintegration of the traditional Indian joint family
system has led to nuclearisation of families, which in turn has led to enhanced demand. Add to this an
increasing population of working women and new job opportunities in emerging service sectors such
as IT-enabled services, retail, food services, entertainment and financial services.
Growing disposable income: More Indian households are getting added to the consuming class with
the growth in income levels. The number of households with income of over Rs 45,000 per annum is
expected to grow from 58 million in 1999-2000 to 125 million by 2011.
What is FDI? An Overall View of FDI allocation in India
Foreign direct investment is the acquisition of assets in a country by foreign entities for the purpose of
control. FDI is ownership of at least 10% of a business.
According to the Ministry of Commerce & Industry, "FDI is freely allowed in all sectors including the
services sector, except a few sectors where the existing and notified sectoral policy does not permit
FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic
Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining
items/activities through Government approval. Government approvals are accorded on the
recommendation of the Foreign Investment Promotion Board (FIPB).” Ministry of Commerce and
Industry has fixed limits for other sectors are as follows:
FDI in India’s Multi Brand Retail Sector
Present Scenario of FDI in Retail Sector in India
FDI in Multi-Brand retailing is prohibited in India. FDI in Single- Brand Retailing was, however,
permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till
May, 2010. Of this, 57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs. 901.64
Crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows
during the period, under the category of single brand retailing. The proposals received and approved
related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags,
lifestyle products etc., covering high-end items. Single brand retail outlets with FDI generally pertain to
high-end products and cater to the needs of a brand conscious segment of the population, mainly
attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific
brand. This segment of customers is distinctly different from one that is catered by the small
retailers/ kirana shops.
FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the
Government approval route, in 1997. It was brought under the automatic route in 2006. Between April,
2000 to March, 2010, FDI inflows of US $ 1.779 billion (Rs.7, 799 Crore) were received in the sector.
This comprised 1.54 % of the total FDI inflows received during the period.
FDI in India’s Multi Brand Retail Sector FDI in Multi Brand Retailing - Global Scenario
FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand
without limits on equity participation, while Malaysia has equity caps on FDI in the retail sector.
FDI in retailing was permitted in China for the first time in 1992. Foreign retailers were initially
permitted to trade only in six Provinces and Special Economic Zones. Foreign ownership was initially
restricted to 49%.
Thailand permits 100% foreign equity, with no limit on the number of outlets. For the retail business, it
has a capital requirement of TBH100 million and TBH20 million for each additional outlet, while it has a
capital requirement ofTBH100 million for each wholesale outlet.
Indonesia permits 100% foreign equity in retail business, with no limit on the number of outlets. It also
does not impose any capital requirements.
Analysis of the Possibility for allowing FDI to India’s Multi Brand Retail Sector
While analyzing the total FDI flow into the country as per Department of Industrial Policy & Promotion
Ministry of Commerce and Industry, FDI in single brand retailing was 909.77 Crore rupees which is
0.16% of the total FDI in India.
India having a total of 5, 42,773 Crore rupees FDI inflow during the last year had only 909.77 Crore
rupees from retail single brand sector. Why the Government is reluctant to allow more FDI flow in retail
sector?
FDI in India’s Multi Brand Retail Sector
FDI Equity Inflows (Month-Wise) During the Calendar Year 2010
Source: Dept. of Industrial Policy and Promotion, Ministry of Commerce and
Industryhttp://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm
Though the data on volume of turnover by retail is not separately maintained, commodity composition
of private consumption expenditure provides reasonable estimates of the size of the retail sector.
As per the National accounts, private final consumption expenditure, increased from Rs 19,26,858
Core in 2004-05 to Rs 32,26,826 Crore in 2008-09, at an average rate of 13.8 per cent per annum-.
However, expenditure on some items like transport and communication; expenditure on food in hotels
and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation are
distinct from trade. Private consumption expenditure adjusted for items which could be considered a.
close approximation to trade, increased from Rs 11,92,405 crore in 2004-05 to Rs 19,93,380 crore in
2008-09, at an average rate of 13.7 per cent3.Rate of growth of GDP at current market prices during
this period at 14.5 per cent, was higher than this growth.
FDI in India’s Multi Brand Retail Sector
Private Final Consumption Expenditure - Commodity Composition
http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm
India is being seen as a potential goldmine for retail investors from over the world and latest research
has rated India as the top destination for retailers for an attractive emerging retail market. India’s vast
middle class and its almost untapped retail industry are key attractions for global retail giants wanting
to enter newer markets. Even though India has well over 5 million retail outlets, the country sorely
lacks anything that can resemble a retailing industry in the modern sense of the term. This presents
international retailing specialists with a great opportunity. The organized retail sector is expected to
grow stronger than GDP growth in the next five years driven by changing lifestyles, burgeoning income
and favorable demographic outline.
Another cap to the retailing industry in India is allowing 51% FDI in single brand outlet. The
government is now set to initiate a second wave of reforms in the segment by liberalizing investment
norms further. This will not only favor the retail sector develop in terms of design concept, construction
quality and providing modern amenities but will also help in creating a consumer-friendly environment.
Retail industry in India is at the crossroads but the future of the consumer markets is promising as the
market is growing, government policies are becoming more favorable and emerging technologies are
facilitating operations in India. And this upsurge in the retail industry has made
FDI in India’s Multi Brand Retail Sector
India a promising destination for retail investors and at the same time has impelled investments in the
real estate sector. As foreign investors cautiously test the Indian Markets for investments in the retail
sector, local companies and joint ventures are expected to be more advantageously positioned than
the purely foreign ones in the evolving India's organized retailing industry.
Reasons for not allowing FDI in Multi brand Retail Sector
The main reasons for not allowing FDI in multi brand retail sector:
1. Fear of foreign companies taking monopoly of Indian retail market
2. Price rise due to the monopoly of foreign retailers
3. Loss of employment opportunities, most of the Indian youth are considering opening a retail outlet in
their locality as the last resort for earning livelihood. It is also the second most employed sector after
agriculture.
4. Organized Indian retail sector holds only 5.5% of the total retail sector and that allowing FDI at this
nascent stage will be adverse to the domestic sector.
5. Foreign retailers will squeeze suppliers and engage in predatory pricing to wipe out competition.
6. Disruption of current balance of the economy by rendering millions of small retailers jobless.
Arguments in Support of Allowing FDI in Multi Brand Retail in India
Those in favour of FDI argue that India has already provided `backdoor' entry
to international retailers. Current norms allow foreign retailers to set up shop in India via the franchisee
route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed
outlets if they manufacture products in India (Benetton) or source their goods domestically. FDI is also
permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for
commercial purposes (Metro, Shoprite). Foreign retailers therefore, have access to the Indian retail
market, while India loses out on the investment.
India is not an integrated homogeneous market; it is a hierarchy of markets
catering to people of many different income levels and tastes. Hence small retailers can very well
survive in our economy.
FDI in India’s Multi Brand Retail Sector
Entry of sophisticated branded products affects the unbranded mass market
only marginally as income of vast population in India lies in low level income zone.
It is more convenient and cost-effective for customers to purchase many of their
daily requirements from the neighborhood stores, especially as these establishments stock goods that
are in particular demand in the locality. Hence, the pop-and-mom street corner shops can very well
survive.
The benefits from greater exports would be particularly high in the farm sector if
FDI is allowed. Right now, there is a tremendous amount of wastage and value loss of agricultural
products due to lack of storage, refrigeration, transportation and processing facilities. As a result,
farmers' price realisation remains low while the consumers in the cities end up paying a high price.
Given the fiscal problems of the government, it is too much to expect it to build the required
infrastructure.
To the extent the large retailers establish a direct linkage with the farmers by
cutting out many layers of middlemen, develop the processing facilities and export the products to
meet their global requirements, farmers would get better prices and bigger markets while the
consumers would benefit in terms of lower prices, better quality and greater variety.
The benefits from higher exports are likely to offset any direct job loss in the
local ‘kirana’ as result of competition from big global retailers. Anyway, if the domestic big players are
allowed to operate, the job loss problem for the small shops would remain, while the benefits from
larger exports would not be there. So, clearly, if big players are to be permitted in retail, this must
extend to FDI. Otherwise, the full range of benefits will not be realized.
Current Entry Routes of Foreign Retailers in India
Even though FDI in multi brand retailing is not allowed, many foreign players have already entered
Indian market through different routes such as: Manufacturing and local
sourcing Franchising Test Marketing Wholesale cash and carry Distribution
FDI in India’s Multi Brand Retail Sector Rationale for Allowing FDI in Multi Brand Retail
Trading
The Agriculture sector needs well-functioning markets to drive growth, employment and economic
prosperity in rural areas of the country. Further, in order to provide dynamism and efficiency in the
marketing system, large investments are required for the development of post-harvest and cold-chain
infrastructure nearer to the farmers' field. FDI in front end retailing is imperative to fund this
investment.
Allowing FDI in front end retail operations will enable organized retailers to generate sufficient cash
to fund this investment. Investment in organized retail by domestic players will be ineffectively
deployed if FDI is delayed. International retailers should be mandated to bring with them technology
and management know-how which will ensure that investment in organized retail works to India's
advantage. In order to provide dynamism and efficiency in the marketing system, large investments
are required for organized retailing, linked with the back end of the value chain. FDI in front-end
retailing is imperative to derive full advantage of the value chain for the producer and the consumer.
International retailers will bring with them technology and management know-how that will finally
impact our whole retail sector through the adoption of best practices.
There is a need to ensure that issues of cost and quality, relating to consumers, are adequately
addressed. This could be achieved through stabilizing prices and reducing inflation, which, in turn,
could be achieved through direct buying from farmers, improving supply chain inefficiencies to lower
transit losses, improved storage capabilities to control supply j demand imbalances, better quality and
safety standards through farmer development and increased processing of produce.
Similarly, there is a need to address issues relating to farmers, through removal of structural
inefficiencies. This could be achieved through liberalized markets, with direct marketing and contract
farming programmes, from which farmers could profit, as also more predictable farm-gate prices,
steadier incomes and better access to evolving consumer preferences through private investors,
especially the organized retail sector. There is also a need to improve postharvest management,
which could be achieved through investments in supply chains and cold storage to minimize losses
and improving processing, as also value addition for better farm incomes. Further, there is a need for
yield improvement, which could be achieved through use of contract farming to
FDI in India’s Multi Brand Retail Sector
disseminate technological know-how, working with farmers to promote awareness about soil quality,
pesticides and fertilizer usage, grading, sorting capabilities and increasing availability of low interest
credit for farmers.
The benefits are not limited to farmers alone. Foreign retailers would be inclined to source from the
Indian market to ensure that goods reach customers on time.
FDI in retailing can boost exports of our country, this can happen because the foreign company will
have close contact with farmers and they will have through knowledge of different markets, which will
help in export. Unless they are allowed to enter our market they will not have good knowledge about
our potential which will adversely affect our exports.
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario
of low competition and poor productivity. It can bring about:
1. Supply Chain Improvement 2. Investment in Technology 3. Manpower and Skill development 4.
Tourism Development 5. Greater Sourcing From India 6. Up gradation in Agriculture 7. Efficient Small
and Medium Scale Industries 8. Growth in market size 9. Greater Productivity
10. Benefits to government: through greater GDP, tax income and employment
FDI in India’s Multi Brand Retail Sector
Issues for Resolution before allowing FDI in Indian Multi Brand Retail Sector
Should FDI in multi brand retail be permitted? If so, should a cap on investment be imposed? If so,
what should this cap be?
To develop the retail trade in food grains, other essential commodities and multi-brand retail in
general; should FDI be leveraged for creating back-end infrastructure? To ensure that foreign
investment makes a genuine contribution to the development of infrastructure and logistics, should it
be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of
back end infrastructure, logistics or agro processing?
It is necessary to encourage only genuine players in this sector and avoid a situation where retail
outlets are run through working capital support from financial institutions. Should a minimum threshold
limit for investment in backend infrastructure logistics be fixed? If so, what should this financial
threshold be?
To develop our rural sector, should conditionality be put on the FDI funded chains relating to
employment? For example, should we stipulate that at least 50 % of the jobs in the retail outlets
should be reserved for the rural youth?
How best the small retailers can be integrated into the upgraded value chain? Can they be provided
access to the logistics/ supply chain set up by the FDI funded retailers? Should it be stipulated that a
minimum percentage of the latter's sales should be made to retailers through special wholesale
windows?
As a part of a calibrated reform process, should foreign investment for such stores be initially allowed
only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced
with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10
kms around the municipal/urban agglomeration limits of such cities be included within the definition of
the city?
What additional steps should be taken to protect small retailers? Should an exclusive legal and
regulatory framework be established to protect their
FDI in India’s Multi Brand Retail Sector
interests? Is a Shopping Mall Regulation Act required? Does this require intervention at national level
or should this be left to the States?
The present public distribution system provides a valuable safety net to vulnerable sections of
society. To ensure that the integrity of the PDS system is not weakened and buffer stock is maintained
at the desired level, should Government reserve the right of first procurement for a part of the season
or put in place a mechanism to collect a certain amount of levy from private traders in case the level of
buffer stock falls below a certain level?
How should compliance be ensured with the above stipulations? Should a centralized agency, to be
nominated by the State Governments concerned, be empowered to grant permissions to every outlet
to be opened? The onus of proving compliance with these conditions could rest with the concerned
retail chain. The chains could submit an annual statement to such State Government agency providing
proof of compliance. Should this agency be empowered to monitor compliance of the present cash
and carry outlets too?
The penalty for non-compliance could include cancellation of approvals as well as denial of future
permissions for such activities. What additional penalties could be levied? Should civil penalties be
imposed? Or criminal? Or both?
Steps to be taken for the smooth introduction of FDI in Multi brand Retailing
When allowing foreign players to enter Indian market through FDI in multi brand retail sector, let
them start by joining hands with domestic companies.
The percentage of FDI in the initial stage should be low (25%) and gradually they should be allowed
to raise their share over years. This will give the domestic companies their tome to establish
themselves and get ready to face the competition from foreign players.
Initially the Foreign players should be allowed to make their presence felt in limited cities. They
should be allowed to expand their business slowly.
Give permission to maximum number of foreign retailers to enter Indian economy so that
competition among them will help control the price hike.
FDI in India’s Multi Brand Retail Sector
Establishment of in-built policy to re-employ/ re-locate people dislocated due to opening of big malls
in the vicinity of their shops.
Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large
retailers are not able to dislocate small retailers by unfair means.
Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of
small retailers; undertaking of proactive programme for assisting small retailers to upgrade
themselves.
Establishment of a National Commission to study the problems of the retail sector; Enactment of an
Act to protect medium and small retailers.
Providing a level playing field for small retailers; Analysis of traffic and economic impacts before a
store is given permission to open.
Setting-up of a Retail Regulatory Authority to look into problems and to act as a whistle-blower.
Adequate safeguards to prevent diversion of agricultural land for building malls etc.
Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of
the entire retail sector.
Formulation of a Model Central Law.
Local players (Domestic companies) can be encouraged to become big organizations through
mergers and acquisitions; this will make them capable of competing with foreign retailers.
FDI in India’s Multi Brand Retail Sector Conclusion
FDI in Multi brand retailing can be allowed in a slow and steady manner. According to World Bank,
opening up the retail sector to foreign direct investment (FDI) would be beneficial for India in terms of
price and availability of products. The Indian Council for Research on International Economic
Relations (ICRIER) has suggested phased opening-up of the retail industry, with 49 per cent foreign
direct investment allowed initially. In a report it released jointly with the Department of Consumer
Affairs, ICRIER said it strongly advocates that FDI should be allowed in retailing since it would speed
up the growth of organized formats. The council has said that since foreign retailers are allowed to
enter the Indian market through other routes, the existing ban on FDI has not acted as an entry
restriction. On the contrary, the country is losing foreign investment while the entry process has
become non-transparent and complicated. India is the only major country which has still not allowed
FDI in retailing.
The study strongly advocates that foreign direct investment should be allowed in retailing since it
would speed up the growth of organized formats. Organized retailing has significant backward
linkages through setting up of supply chains, investment in food processing industry and
manufacturing units increased productivity of agriculture, growth of interlinked sectors such as tourism
and IT. Consumers will also gain from organized retailing since it leads to lower price, improves the
quality of the product and widens the choice of products available to them. The slow growth of
organized retailing is affecting the progress of allied sectors such as agriculture, food-processing
industry etc.
FDI in India’s Multi Brand Retail Sector References
Retail in India. A Critical Assessment by Mathew Joseph and Nirupama Soundararajan - Published
by Academic Foundation in association with ICRIER.
FDI in India’s Retail Sector More Bad than Good? - By Mohan Guruswamy, Kamal Sharma, Jeevan
Prakash Mohanty, Thomas J. Korah, CPAS- Centre for Policy Alternatives.
The Department of Industrial Policy and Promotion - Subject: Issue of discussion paper on Foreign
Direct Investment (FDI) in Multi-Brand Retail Trading.
Official Website of Department of Industrial Policy and Promotion, Ministry of Commerce and
Industry http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm.
FDI in retail: More benefits than costs by Alok Ray, The Hindu Business Line, November 2005.
India among top nations to offer strong retail potential: PwC study, The Hindu Business Line, October
2005.
Govt. should open up FDI in multi-brand retail: Montek, The Economic Times, December, 2010.
FDI in Retail Sector India by Arpita Mukherjee, Nitisha Patel. Published by Academic Foundation in
association with The Indian Council for Research on International Economic Relations (ICRIER).
Indian Retail Sector - A primer by Nitin Mehrotra, Published by ICFAI University Press, First Edition.
Role of Logistics and Supply Chain Management in Organized Retail
ABSTRACT
Foreign direct investment (FDI) plays an important role in India’s growth dynamics. There are
several examples of the benefits of FDI in India. FDI in the retail sector can expand markets by
reducing transaction and transformation costs of business through adoption of advanced supply
chain and benefit consumers, and suppliers (farmers). This also can result in net gains in
employment at the aggregate level..
Indian industries due to globalization facing lot of competition, in order to protect the business
interest, every industry is trying to improve their process it could make the cheaper product with
better quality. For that purpose industries are trying to redefine, reorganize and reengineering
their traditional processes. More emphasis is given on the effectiveness of the whole supply
chain rather than single function of the supply chain. Supply chain management is complex
process of different function; involves so many issues at different levels. And many organized
retail stores adopted six sigma concepts to reduce the cost, defect, cycle time reduction and to
increase the customer relationship management, market growth share, productivity and product
and service management.
The objective of present work is to find out the importance of logistics and supply chain
management in organized retail markets and impact of logistics and supply chain management
on organized retail markets. And to find out the problems areas in supply chain management on
organized retail store. (Critical to customer, critical quality and voice of the customer)
In the organized retail market in India the role of supply chain is very important for the Indian
customer demands at affordable prices a verity of product mix and it is ensure to the customers
in all the various offering that company decides for its customer, be it cost, service, or the
quickness in responding to ever changing taste of the customer.
KEYWORDS:-
Supply chain management, organized retail store, customer, quality and six sigma.
Key words- India, Foreign direct investment, Retail, Supply chain, Farmers
INTRODUCTION:
Supply chain management is a topic of importance among the logistic managers and researchers
because it is a Consider with a competitive edge. Supply chain management deals with the
management of materials, information and financial flows in a net work consisting of suppliers,
manufactures, distributes and customers.
From an analytical point of view a supply chain is simply a net work of material processing cells
with the characteristics such as supply, transformation and demand. Supply chain management is
management of a net work of interconnected businesses involved in the ultimate provision of
product and service packages required by end customer. Supply chain management spans all
movement and storage of raw material work in process inventory, and finished goods from point
of origin to point of consumption.
The success in this competitive and dynamic sector depends on achieving an efficient logistics
and supply chain, which can be provided by professionals, as they combined the best systems
and expertise to manage a ready flow of goods and services.
The retail boom promises to give an impetus to host of allied sectors and the logistics industry, as
the back bone of the retail sector, stands to gain the maximum.
In India the logistics market is mainly thought to mean transportation. But the major elements of
logistics cost for industries include transportation, warehousing etc., and other value added
services such as packaging. The Logistics cost accounts of 13 percentage of GDP (Gross
domestic product). The industry is currently on an upswing and is poised for a growth of 20
percentages in the coming years.
With extension of retail supply chain will take on an increasingly important role. With the end
consumer becoming more demanding and time conscious, the need for just in time services is
increasing. In retail where competition is intense and stakes are high, customer satisfaction is
paramount .
India is witnessing changing life styles, increased incomes, the demographic variability's and
vibrant democracy. Indian retailing is expanding and is expected to reach at US $637 billions by
2015. Modern retail is soon capturing 22% share in total retail by 2011 with the expansion of 12
millions outlets and provision of creating 1.5 millions jobs in 2 to 3 years. The industry is
playing vital role in the economic growth of the country. The concept of shopping is moving in
and around hypermarkets, supermarkets, and specialty stores and in other formats.
Retail industry is one of the key upcoming sectors in India contributing major to employment
generation. Retail in India is featured with street markets and convenience stores which accounts
for 96% of retail business. Most of the stores are very small with an area of less than 50 sqcm.
But the organized retail
Indian Middle Class 1984-85 By 2005
< 10% of total population Approx 40%
Source NCAER
Organized retail which presently account for only 4-6 percent of the total market is likely to
increase its share to over 30% by 2013. it offers huge potential for growth in coming years.
India is becoming most favored retail destination in the world.
Generating employment for some 2.5 million people in various retail operations and over 10
million additional workforce in retail support activities including contract production and
processing, supply chain and logistics, retail real estate development and management etc.; the
retail sector is growing a scorching pace of about 37 percent in 2007 and expected to grow by 42
per cent in 2008. With this enormous growth, the retail sector is also facing challenges n the
fronts of escalating real estate cost, scarcity of skilled workforce and structured supply of
merchandise.
IMPORTANCE OF SUPPLYCHAIN AND LOGISTICS MANAGEMENT
One of the most important challenge in organized retail in India is faced by poor supply chain
and logistics management. The importance can be understood by the fact that the logistics
management cost component in India is as high as 7% - 10% against the global average of 4% -
5% of the total retail price. Therefore, the margins in the retail sector can be improved by 3% to
5% by just improving the supply chain and logistics management.
The supply chain management is logistics aspect of a value delivery chain. It comprises all of
the parties that participate in the retail logistics process: Manufacturers, wholesalers, Third Party
Specialists like Shippers, Order Fulfillment House etc. and the Retailer. Here, logistics is the
total process of planning, implementing and coordinating the physical movement of merchandise
from manufacturer to retailer to customer I the most timely, effective and cost efficient manner
possible. Logistics regards order processing and fulfillment, transportation, warehousing,
customer service and inventory management a interdependent functions in the value delivery
chain. It oversees inventory management decisions as items travel through a retail supply chain.
If a logistics system works well, the retail reduces stock outs, hold down inventories and improve
customer service – all at the same time.
Logistics and supply chain enables an organized retailer to move or store products more
effectively, efficient logistics management not only prevents needless movement of goods,
vehicles transferring products back and forth; but also frees up storage space for more productive
use.
Retail analysts say on-time order replenishments will become even more critical once the Wal-
Mart/Bharati combine begins operations – the American retailer works almost entirely on cross-
docking and is likely to demand higher service levels, including potential levies for delays in
shipment.
The efficiency and effectiveness of supply chain and logistics management can also be
understood by the fact that modern retail stores maintain lower inventories are kept; while in a
modern retail store like hyper city its nine days and its under two weeks for Food Bazaar. Now,
it is beneficial for both the manufacturer well as the retailer. If we go through the following food
supply chain in India, we find that a lot can be improved by maintaining the supply chain and
logistics.
OBJECTIVES OF RESEARCH:
1. To understand the importance of logistics and supply chain management in organized retail
markets.
2. To study on impact of logistics and supply chain management on organized retail market.
Food Supply Chain in India
In India, about 60 percent of food quality is lost in the supply chain from the farm to the final
consumer. Consumers actually end up paying approximately about 35 percent more than which
they could be paying if the supply chain was improved, because of wastage as well as multiply
margins in the current supply structure. The farmer in India gets around 30 percent of what the
consumer pays at the retail store. Compare this with the situation obtaining in the USA, where
farmers can receive up to 70 percent of the final retail price and wastage levels are as low as 4 to
6 percent. One can easily understand the benefits that could be generated from emulating those
practices and tapping that expertise for the supply chain in India.
As supply chain Management involves procuring the right inputs (raw materials, components
and capital equipments); converting them efficiently into finished products and dispatching them
to the final destinations; there is a need to study as to how the company's suppliers obtain their
inputs. The supply chain perspective can help the retailers identify superior suppliers and
distributors and help them improve productivity, which ultimately brings down the customers
costs. At the same time, Market logistics helps planning the infrastructure to meet demand, then
implementing and controlling the physical flows of material and final goods from point of origin
to points of use, to meet customer requirements at a profit.
Till now most retailers in India have invested majorly into the front end, but relatively little on
the back end and supply chain. Even in countries like the USA, Germany and England, where
organized retail is highly developed; supply chain efficiency is a major concern. The nature of
retail sector in India is different from other countries around the world. The organized retail
sector in India is highly fragmented and there are huge inefficiencies in the supply chain.
The most important part of retailing business is to find a balance between investing in front-end
and back-end operations. The channel dynamics is going to change over next couple of years as
the retailers start growing in size and their bargaining power is likely to increase. Probably that
would bring some kind of mutual understanding between manufactures and retailers to develop
strong supply chain network. In such a scenario, both the existing operators and new operators
must put collaborative efforts to phase out inefficiencies in the supply chain network.
Now, let us try to find out what efforts are being taken up by the big retailers in India like Future
Group with retail stores like Big Bazaar and Pantaloons, Reliance Retail and Wal-Mart & Bharti
to improve the efficiency and effectiveness of supply chain and logistics. We will also try to find
out the changed role of Agriculture Produce Marketing Cooperatives and third party sourcing
firms.
Reliance Fresh
Reliance Retail is also going to open one store for every 3,000 families within a radius of 2 km
across all locations by 2011. The company is competing directly with the large number of
traditional local provision stores. Reliance Retail is either going to set up new stores in the
identified areas or take over existing stores. The company has already done that in Mumbai and
other cities.
Of the four million sq ft of retail space to be created under the "Reliance Fresh" brand (for
groceries), million will e through acquisitions. The retailer is also moving into laundry, personal
care and apparel product lines, in which it plants to launch private labels. Reliance is planning to
roll out its specialty form stores this year, beginning with consumer durables, for which it has
struck sourcing deals with companies in Hong Kong, the Chinese mainland and with Videocon
in India.
To strengthen its links with farmers, the company is setting up integrated agri-retail business
centres,which include three processing and distributing centres, 51 retail outlets for farmers and
75 rural business hubs, all with an investment of US $445 million. Many companies, looking at
the retail boom in food and grocery, are setting up ventures to help retailers source these goods.
Reliance Logistics Ltd part of Reliance Industries Ltd., currently handles Reliance Retail's
logistics services.
Wal-Mart and Bharati
The success of Wal-Mart is well known all across the world. One of the major factors behind
their success is the right implementation of supply and logistics management. Now the same
supply chain and logistics management take a front seat here and that's why Wal-Mart is coming
to India in a joint venture with Bharti Group. Here, Wal-Mart is going to manage the back end
operation, while Bharti will manage the front end operation.
Wal-Mart has also started that it would replicate its global supply chain model in India, while
taking into account the unique feature of the Indian market. They are also going to emphasize on
local sourcing of goods. Besides sourcing locally, Wal-Mart, through its international operations
is also in a position to source globally. The company is set to roll out its first set of stores by the
first quarter of 2008, in cities that have a population of one million. Wal-Mart claims it will take
35% of the Indian retail market by 2015.
It is the sheer importance of the logistics management that Wal-Mart's fully-owned logistics arm
Gazel has already confirmed its India foray and is going to look after the Wal-Mart and Bharti
retail venture. They are closely study various logistics providers like Radhakrishnan Foods,
before they finally closed on its India model. Again, Bharti Enterprises is directly negotiating
with the rail authorities instead of negotiating with a logistics provider.
SUMMARY OF FINDINGS:
This study was conducted only in Reliance fresh ,Wal- Mart and Bharti. It has been observed
that Reliance fresh strengthen its logistics and supply chain of products and services with their
farmers (integrated Agri Retail Business centres) Wal-mart is entering into India through the
help of Bharti group.
CONCLUSION:
The role of supply chain in Indian organized retail has expanded over the years with the boom in
this industry. The growth of the Indian retail industry to a large extent depends on supply chain,
so efforts must be made by the Indian retailers to maintain it properly.
Therefore, with the generous use of Global and Local Experiences, Indian retailers are going to
improve their bottom lines with efficient, management of Supply Chain and Logistics. At the
same time, Indian Retailers like future Group with retail stores like Big Bazaar, Pantaloons and
Reliance retail are also going to show the world as to how it can be managed in a more
innovative and efficient manner.
ACKNOWLEDGEMENTS
I am heartily thankful to my parents whose encouragement, guidance &support from initial to
final level enabled me to develop an best article.
Lastly, We offer ours regards and blessings to all of those who supported me in any respect
during the completion of my article
Role of Logistics and Supply Chain Management in Organized Retail
REFERENCES:
1. International retail marketing strategy, Dr. Ramkishen. Y, Jaico Publishing House, First Edition 2010.
2. Exploring the supply chain Theory & Practices, Upendra Kachru, Excel Books, First Edition 2009.
3. www.indianretail.com
4. www.bigbazaar.com
5. www.pantaloon.com
6. www.vishalmegamart.com
7. Johnson,peter(1995), "supply chain ,management :the past, the present and the future", Journal of Manufacturing engineer, Oct', pp.213-217
Abstract
Foreign Direct Investment in India’s Retail Sector: Some Issues
Structure of Indian Retail Sector
A sale to the ultimate consumer.
The retail industry is mainly divided into: - 1) Organised and 2) Unorganised Retailing
The Indian retail sector is highly fragmented with 97 per cent of its business being
run by the unorganized retailers. The organized retail however is at a very nascent
stage. The sector is the largest source of employment after agriculture, and has
deep penetration into rural India generating more than 10 per cent of India‘s GDP.[16]
ADVANTAGES OF CONVENTIONAL AND MODERN ORGANISED RETAIL
REFORMS
Conventional Modern Organized
Large Bargaining Power Low operating cost and overheads
Proximity to consumers Range and variety of goods
Long operating hours, strong
customer relations, convenience
and hygiene.
Long operating hours, quality
assurance (brand related and
durability).
15. Association of Traders of Maharashtra v. Union of India, 2005 (79) DRJ 426
16. India‘s Retail Sector (Dec 21, 2010)
http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf
13
3.2 Growth and Evolution of Indian Retail Sector
The Indian Retail Industry is the 5th largest retail destination and the second most
attractive market for investment in the globe after Vietnam as reported by AT
Kearney‘s seventh annual Globe Retail Development Index (GRDI), in 2008.The
growing popularity of Indian Retail sector has resulted in growing awareness of
quality products and brands. As a whole Indian retail has made life convenient, easy,
quick and affordable. Indian retail sector specially organized retail is growing rapidly,
with customer spending growing in unprecedented manner. It is undergoing
metamorphosis. Till 1980 retail continued in the form of kiranas that is unorganized
retailing. Later in 1990s branded retail outlet like Food World, Nilgiris and local retail
outlets like Apna Bazaar came into existence. Now big players like Reliance, Tata‘s,
Bharti, ITC and other reputed companies have entered into organized retail
business.
The multinationals with 51% opening of FDI in single brand retail has led to direct
entrance of companies like Nike, Reebok, Metro etc. or through joint ventures like
Wal-mart with Bharti, Tata with Tesco etc.
Evolution of retail sector can be seen in the share of organized sector in
2007 was 7.5% of the total retail market. Organized retail business in India is very
small but has tremendous scope. The total in 2005 stood at $225 billion, accounting
for about 11% of GDP. In this total market, the organized retail accounts for only $8
billion of total revenue. According to A T Kearney, the organized retailing is expected
to be more than $23 billion revenue by 2010.
The retail industry in India is currently growing at a great pace and is expected to go
up to US$ 833 billion by the year 2013. It is further expected to reach US$ 1.3 trillion
by the year2018 at a CAGR of 10%. As the country has got a high growth rate, the
consumer spending has also gone up and is also expected to go up further in the
future. In the last four years, the consumer spending in India climbed up to 75%. As
a result, the Indian retail industry is expected to grow further in the future days. By
the year 2013, the organized sector is also expected to grow at a CAGR of 40%. The
key factors that drive growth in retail industry are young demographic profile,
increasing consumer aspirations, growing middle class incomes and improving
demand from rural markets. Also, rising incomes and improvements in infrastructure
are enlarging consumer markets and accelerating the convergence of consumer
tastes. Liberalization of the Indian economy, increase in spending per capita income
and the advent of dual income families also help in the growth of retail sector.
Moreover, consumer preference for shopping in new environs, availability of quality
real estate and mall management practices and a shift in consumer demand to
foreign brands like McDonalds, Sony, Panasonic, etc. also contributes to the spiral of
growth in this sector. Furthermore, the Internet revolution is making the Indian
consumer more accessible to the growing influences of domestic and foreign retail
chains.
One report estimates the 2011 Indian retail market as generating sales of about
$470 billion a year, of which a miniscule $27 billion comes from organized retail such
as supermarkets, chain stores with centralized operations and shops in malls. The
opening of retail industry to free market competition, some claim will enable rapid
growth in retail sector of Indian economy. Others believe the growth of Indian retail
industry will take time, with organized retail possibly needing a decade to grow to a
14
25% share.[17] A 25% market share, given the expected growth of Indian retail
industry through 2021, is estimated to be over $250 billion a year: a revenue equal to
the 2009 revenue share from Japan for the world's 250 largest retailers.,[18][19]
The Economist forecasts that Indian retail will nearly double in economic value,
expanding by about $400 billion by 2020.[20] The projected increase alone is
equivalent to the current retail market size of France.
In 2011, food accounted for 70% of Indian retail, but was under-represented by
organized retail. A.T. Kearney estimates India's organized retail had a 31% share in
clothing and apparel, while the home supplies retail was growing between 20% to
30% per year.[21] These data correspond to retail prospects prior to November
announcement of the retail reform.
3.3 Challenges of Retailing in India
In India the retailing industry has a long way to go and to become a truly flourishing
industry, retailing needs to cross various hurdles. The first challenge facing the
organized retail sector is the competition from unorganized sector. Needless to say,
the Indian retail sector is overwhelmingly swarmed by the unorganized retailing with
the dominance of small and medium enterprises in contradiction to the presence of
few giant corporate retailing outlets.
The trading sector is also highly fragmented, with a large number of intermediaries
who operate at a strictly local level and there is no ‗barrier to entry‘, given the
structure and scale of these operations (Singhal 1999).The tax structure in India
favors small retail business. Organized retail sector has to pay huge taxes, which is
negligible for small retail business. Thus, the cost of business operations is very high
in India. Developed supply chain and integrated IT management is absent in retail
sector. This lack of adequate infrastructure facilities, lack of trained work force and
low skill level for retailing management further makes the sector quite complex. Also,
the intrinsic complexity of retailing- rapid price changes, threat of product
obsolescence, low margins, high cost of real estate and dissimilarity in consumer
groups are the other challenges that the retail sector in India is facing.
The status of the retail industry will depend mostly on external factors like
Government regulations and policies and real estate prices, besides the activities of
retailers and demands of the customers also show impact on retail industry. Even
though economy across the globe is slowly emerging from recession, tough times lie
ahead for the retail industry as consumer spending still has not seen a consistent
increase. In fact, consumer spending could contract further as banks have been
overcautious in lending. Thus, retailers are witnessing an uphill task in terms of
wooing consumers, despite offering big discounts. Additionally, organised retailers
have been facing a difficult time in attracting customers from traditional kirana stores,
especially in the food and grocery segment.
17. "Indian retail: The supermarket‘s last frontier". The Economist. 3 December 2011.
18.INDIAN RETAIL INDUSTRY: A Report". CARE Research. March 2011.
19.Global Powers of Retailing 2011". Deloitte. 2011.
20. "India's retail reform: No massive rush". The Economist. 2 December 2011.
21.Retail Global Expansion: A Portfolio of Opportunities". AT Kearney. 2011.
15
While in some sectors the restrictions imposed by the government are
comprehensible; the restrictions imposed in few others, including the retail sector,
are utterly baseless and are acting as shackles in the progressive development of
that particular sector and eventually the overall development of the Indian Inc. The
scenario is kind of depressing and unappealing, since despite the on-going wave of
incessant liberalization and globalization, the Indian retail sector is still aloof from
progressive and ostentatious development. This dismal situation of the retail sector
undoubtedly stems from the absence of an FDI encouraging policy in the Indian retail
sector.
Also FDI encouraging policy can remove the present limitations in Indian
system such as
1. Infrastructure
There has been a lack of investment in the logistics of the retail chain, leading to an
inefficient market mechanism. Though India is the second largest producer of fruits
and vegetables (about 180 million MT), it has a very limited integrated cold-chain
infrastructure, with only 5386 stand-alone cold storages, having a total capacity of
23.6 million MT. , 80% of this is used only for potatoes. The chain is highly
fragmented and hence, perishable horticultural commodities find it difficult to link to
distant markets, including overseas markets, round the year. Storage infrastructure
is necessary for carrying over the agricultural produce from production periods to the
rest of the year and to prevent distress sales. Lack of adequate storage facilities
cause heavy losses to farmers in terms of wastage in quality and quantity of produce
in general. Though FDI is permitted in cold-chain to the extent of 100%, through the
automatic route, in the absence of FDI in retailing; FDI flow to the sector has not
been significant.
2. Intermediaries dominate the value chain
Intermediaries often flout mandi norms and their pricing lacks transparency.
Wholesale regulated markets, governed by State APMC Acts, have developed a
monopolistic and non-transparent character. According to some reports, Indian
farmers realize only 1/3rd of the total price paid by the final consumer, as against
2/3rd by farmers in nations with a higher share of organized retail.
3. Improper Public Distribution System (“PDS”)
There is a big question mark on the efficacy of the public procurement and PDS setup
and the bill on food subsidies is rising. In spite of such heavy subsidies, overall
food based inflation has been a matter of great concern. The absence of a ‘farm-tofork’
retail supply system has led to the ultimate customers paying a premium for
shortages and a charge for wastages.
4. No Global Reach
The Micro Small & Medium Enterprises (―MSME‖) sector has also suffered due to
lack of branding and lack of avenues to reach out to the vast world markets. While
India has continued to provide emphasis on the development of MSME sector, the
share of unorganised sector in overall manufacturing has declined from34.5% in
1999-2000 to 30.3% in 2007-08. This has largely been due to the inability of this
sector to access latest technology and improve its marketing interface.
16
Thus the rationale behind allowing FDI in Indian retail sector comes from the fact,
that it will act as a powerful catalyst to spur competition in retail industry, due to
current scenario of above listed limitations, low completion and poor productivity.
Permitting foreign investment in food-based retailing is likely to ensure adequate flow
of capital into the country & its productive use, in a manner likely to promote the
welfare of all sections of society, particularly farmers and consumers. It would also
help bring about improvements in farmer income & agricultural growth and assist in
lowering consumer prices inflation.[22]
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms
of quality standards and consumer expectations, since the inflow of FDI in retail
sector is bound to pull up the quality standards and cost-competitiveness of Indian
producers in all the segments. It is therefore obvious that we should not only permit
but encourage FDI in retail trade.
.Lastly, it is to be noted that the Indian Council of Research in International Economic
Relations (ICRIER), a premier economic think tank of the country, which was
appointed to look into the impact of BIG capital in the retail sector, has projected the
worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also
come to conclusion that investment of ‗big‘ money (large corporate and FDI) in the
retail sector would in the long run not harm interests of small, traditional, retailers.[23]
In light of the above, it can be safely concluded that allowing healthy FDI in the retail
sector would not only lead to a substantial surge in the country‘s GDP and overall
economic development, but would inter alia also help in integrating the Indian retail
market with that of the global retail market in addition to providing not just
employment but a better paying employment, which the unorganized sector (kirana
and other small time retailing shops) have undoubtedly failed to provide to the
masses employed in them.
Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the
American Chamber of Commerce in India, The Retail Association of India (RAI) and
Shopping Centers Association of India (a 44 member association of Indian multibrand
retailers and shopping malls) favour a phased approach toward liberalising
FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51
per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and
TESCO share the same view and insist on a clear path towards 100 per cent
opening up in near future. Large multinational retailers such as US-based Walmart,
Germany‘s Metro AG and Woolworths Ltd, the largest Australian retailer that
operates in wholesale cash-and-carry ventures in India, have been demanding
liberalisation of FDI rules on multi-brand retail for some time.[24]
22.Nabael Mancheri, India‘s FDI policies: Paradigm shift,
http://www.eastasiaforum.org/2010/12/24/indias-fdi-policiesparadigm-
shift/-
23.Sarthak Sarin, (Nov 23, 2010) Foreign Direct Investment in Retail Sector
http://www.legalindia.in/foreign-direct-investmentin-
retail-sector-others-surmounting-india-napping]
24. Nabael Mancheri, India‘s FDI policies: Paradigm shift,
http://www.eastasiaforum.org/2010/12/24/indias-fdi-policiesparadigm-
shift/-
17
3.4 Challenges and Attractions for Global Retailers
Challenges:
History has witnessed that the concern of allowing unrestrained FDI flows in the
retail sector has never been free from controversies and simultaneously has been an
issue for unsuccessful deliberation ever since the advent of FDI in India. Where on
one hand there has been a strong outcry for the unrestricted flow of FDI in the retail
trading by an overwhelming number of both domestic as well as foreign corporate
retail giants; to the contrary, the critics of unrestrained FDI have always fiercely
retorted by highlighting the adverse impact, the FDI in the retail trading will have on
the unorganized retail trade, which is the source of employment to an enormous
amount of the population of India.
The antagonists of FDI in retail sector oppose the same on various grounds, like,
that the entry of large global retailers such as Wal-Mart would kill local shops and
millions of jobs, since the unorganized retail sector employs an enormous
percentage of Indian population after the agriculture sector; secondly that the global
retailers would conspire and exercise monopolistic power to raise prices and
monopolistic (big buying) power to reduce the prices received by the suppliers;
thirdly, it would lead to asymmetrical growth in cities, causing
discontent and social tension elsewhere. Hence, both the consumers and the
suppliers would lose, while the profit margins of such retail chains would go up.
Many trading associations, political parties and industrial associations have argued
against FDI in retailing due to various reasons. It is generally argued that the Indian
retailers have yet to consolidate their position. The existing retailing scenario is
characterized by the presence of a large number of fragmented family owned
businesses, who would not be able to survive the competition from global players.
The examples of south East Asian countries show that after allowing FDI, the
domestic retailers were marginalised and this led to unemployment.
Another apprehension is that FDI in retailing can upset the import balance, as large
international retailers may prefer to source majority of their products globally rather
than investing in local products. The global retailers might resort to predatory pricing.
Due to their financial clout, they often sell below cost in the new markets. Once the
domestic players are wiped out of the market foreign players enjoy a monopoly
position which allows them to increase prices and earn profits.
Indian retailers have argued that since lending rates are much higher in India, Indian
retailers, especially small retailers, are at a disadvantageous position compared to
foreign retailers who have access to International funds at lower interest rates. High
cost of borrowing forces the domestic players to charge higher prices for the
products. Another argument against FDI is that FDI in retail trade would not attract
large inflows of foreign investment since very little investment is required to conduct
retail business. Goods are bought on credit and sales are made on cash basis.
Hence, the working capital requirement is negligible. On the contrary; after making
initial investment on basic infrastructure, the multinational retailers may remit the
higher amount of profits earned in India to their own country.
18
ATTRACTIONS
Retailing is being perceived as a beginner and as an attractive commercial business
for organized business i.e. the pure retailer is starting to emerge now. Indian
organized retail industry is one of the sunrise sectors with huge growth potential.
Total retail market in India stood at USD 350 billion in 2007-08 and is estimated to
attain USD 573 billion by 2012-13.
Organised retail industry accounts for only 5.5% of total retail industry and is
expected to reach 10% by 2012 (http://business.rediff.com). AT Kearney, the wellknown
international management consultancy, recently identified India as the
‗second most attractive retail destination‘ globally from among thirty emergent
markets. It has made India the cause of a good deal of excitement and the cynosure
of many foreign investors‘ eyes. With a contribution of an overwhelming 14% to the
national GDP and employing 7% of the total workforce (only agriculture employs
more) in the country, the retail industry is definitely one of the pillars of the Indian
economy (http://www.indiaretailbiz.com/blog/2009/07/02).
Foreign companies‘ attraction to India is the billion-plus population. Also, there are
huge employment opportunities in retail sector in India. India‘s retail industry is the
second largest sector, after agriculture, which provides employment. According to
Associated Chambers of Commerce and Industry of India (ASSOCHAM), the retail
sector will create 50,000 jobs in the next few years. As per the US Census Bureau,
the young population in India is likely to constitute 53per cent of the total population
by 2020 and 46.5 per cent of the population by
2050 — much higher than countries like the US, the UK, Germany, China etc. India‘s
demographic scenario is likely to change favourably, and therefore, will most
certainly drive retail sales growth, especially in the organised retail segment. Even
though organised retailer shave a far lesser reach in India than in other developed
countries, the first-mover advantage of some retail players will contribute to the
sector‘s growth.
India in such a scenario presents some major attractions to foreign retailers. There is
a huge, industry with no large players. Some Indian large players have entered just
recently like Reliance, Trent. Moreover, India can support significant players
averaging $1 bn. in Grocery and $0.3- 0.5 bn. in apparel within next ten years. The
transition will open multiple opportunities for companies and investors. In addition to
these, improved living standards and continuing economic growth, friendly business
environment, growing spending power and increasing number of conscious
customers aspiring to own quality and branded products in India are also attracting
to global retailers to enter in Indian market.
According to industry experts, organised retail in India is expected to increase from 5
per cent of the total market in 2008 to 14 - 18 per cent of the total retail market and
reach US$ 450billion by 2015 (Mckinsey 2008).Furthermore, during 2010-12, around
55 million square feet (sq.ft.) of retail space will be ready in Mumbai, national capital
region (NCR), Bangalore, Kolkata, Chennai, Hyderabad and Pune. Besides,
between 2010 and 2012, the organised retail real estate stock will grow from the
existing 41 million sq.ft. to 95 million sq.ft. (Knight Frank India 2010).
Thus, there is certainly a lucrative opportunity for foreign players to enter the Indian
terrain.
19
Growth rates of the industry both in the past and those expected for the next decade
coupled with the changing consumer trends such as increased use of credit cards,
brand consciousness, and the growth of population under the age of 35 are factors
that encourage a foreign player to establish outlets in India (Kalathur 2009). India
thus continues to be among the most attractive countries for global retailers. Foreign
direct investment (FDI) inflows between April 2000 and April 2010, in single-brand
retail trading, stood at US$ 194.69 million, according to the Department of Industrial
Policy and Promotion (DIPP).
The Indian Council of Research in International Economic Relations (ICRIER), a
premier economic think tank of the country, which was appointed to look into the
impact of BIG capital in the retail sector, has projected the worth of Indian retail
sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion
that investment of ‗big‘ money in the retail sector would in the long run not harm
interests of small, traditional, retailers. A number of global retail giants are thus
eyeing this opportunity to swarm this seemingly nascent sector and exploit its
unexplored potential.
Introduction
In the organized retail market in India the role of supply chain is very important for the Indian
customer demands at affordable prices a variety of product mix. It is the supply chain that
ensures to the customer in all the various offerings that a company decide for its customers, be it
cost, service, or the quickness in responding to ever changing tastes of the customer.
The infrastructure in India in terms of road, rail, and air links are not sufficient . And so
warehousing plays a major role as an aspect of supply chain operations. To overcome these
problems, the Indian retailer is trying to reduce trans portion costs and is investing in logistics
through partnership or directly. The Indian organized retail sector is growing so the role of
supply chain becomes all the more important. It should become all the more responsive and
adaptive to customers demand. There is also need for the supply chain to be more cost efficient
and collaborative to win the immense competition in this sector.
The role of supply chain in Indian organized retail has expanded over the years with the boom in
this industry. The growth of the Indian retail industry to a large extent depends on supply chain,
so efforts must be made by the Indian retailers to maintain it properly.
Growth of FDI in Retail
15 Years of Opening the Indian Retail Sector – Milestones Achieved So FarSeptember 19, 2012
Since 1997, the Government of India has gradually opened
up the retail sector for foreign investments despite the reservations in certain quarters that
opening up of retail sector will lead to job losses, predatory pricing, reduction in farmers‟ price
realization and loss of entrepreneurial opportunities. The response from foreign retailers to the
earlier attempts of partial liberalization was very cautious. No retailer has made any major
investment yet.
The Ministry of Commerce has organized the retail sector in India into three categories i)
single brand retail ii) multi brand retail and iii) cash & carry. In 2006, FDI in single-brand
retailing was permitted to the extent of 51%. Retail FDI inflow between April 2006 and March
2010 is a pathetic US$194mn, comprising 0.21% of the total FDI inflows during the period.
The following Chart Shows the Milestones on How Retail sector has gradually been
opened-up for foreign retailers since 1997
How FDI In Multi-Brand Retail Will help India and the Sector ?
Infrastructure – FDI can bring about an improvement in supply chain infrastructure and
investment in technology and skill development.
Better Income for farmers Price realization for farmers selling directly to organised retailers is
expected to be much higher than that received from selling in the mandis
Empowers Consumers with better quality of products and lower prices: Past trends indicate
that consumers will benefit from organized retail in the domestic market.
Since the opening of the sector in 1997, the penetration of organised retail has increased from
1% to 7%. Global retailers didn‟t commit large investments as FDI in the front-end retailing was
not permitted. However, with the opening up of sector for 51% FDI, we should see more funds
flowing in and the momentum gradually picking up even though certain issues still need to be
addressed.
McKinsey & Company recently released their report named
`The Great Indian Bazaar: Organized Retail Comes of Age in
India’. The report discusses various issues related to retail in
India like future growth, real estate implication, supply
chain issues, Human resource management, changing
customers' demographics and tastes etc.
Rising Income to increase consumerism growth
The country’s overall retail sector is expected to grow to $450 billion (Rs20.85 trillion) business by 2015. It is almost comparable to Italy’s current market size of $462 billion (among the world’s top 10 retail markets) and larger than Brazil’s current retail market size of $258 billion. If we go by another McKinsey report “The rise of Indian Consumer Market”, this consumer market is expected to be quadrupled by year 2025.
The consultancy major McKinsey's retail report entitled 'The Great Indian Bazaar' pictures Indian market as full of opportunities yet highly competitive in nature. It talks about uniqueness of Indian consumers which separates them from rest of world in some aspect. For example, Indians generally don’t prefer packaged vegetables and fruits as they associate them with lack of freshness, whereas in US, packaged vegetables are very popular. According to report, Global players looking to enter the Indian retail market need to customize their retail model rather than apply same store model which worked elsewhere
oreign Direct Investment in India’s Single and Multi-Brand RetailPosted on February 2, 2012 by India Briefing
New opportunities and developments lie in store for foreign retailers
By Chris Devonshire-Ellis and Ankit Shrivastava, Dezan Shira & Associates
Feb. 2 – As India has liberalized its single brand
retail industry to permit 100 percent foreign investment, we take a look at the regulatory issues
and legal structures pertinent to establishing operations in this new dynamic market. That India
should be well on the radar for foreign retailers was recently supported by A.T. Kearney, whose
2011 Global Retail Development Index ranks the nation as fourth globally.
India’s retail industry is estimated to be worth approximately US$411.28 billion and is still
growing, expected to reach US$804.06 billion in 2015. As part of the economic liberalization
process set in place by the Industrial Policy of 1991, the Indian government has opened the
retail sector to FDI slowly through a series of steps:
The Indian government removed the 51 percent cap on FDI into single-brand retail outlets in
December 2011, and opened the market fully to foreign investors by permitting 100 percent
foreign investment in this area.
It has also made some, albeit limited, progress in allowing multi-brand retailing, which has so far
been prohibited in India. At present, this is restricted to 49 percent foreign equity participation.
The specter of large supermarket brands displacing traditional Indian mom-and-pop stores is a
hot political issue in India, and the progress and development of the newly liberalized single-
brand retail industry will be watched with some keen eyes as concerns further possible
liberalization in the multi-brand sector.
In this article, we discuss the policy developments for FDI in these two retail categories, with a
focus on the details of the multi-brand retail FDI discussion paper and related policy
developments.
FDI in “single-brand” retail
While the precise meaning of single-brand retail has not been clearly defined in any Indian
government circular or notification, single-brand retail generally refers to the selling of goods
under a single brand name.
Up to 100 percent FDI is permissible in single-brand retail, subject to the Foreign Investment
Promotion Board (FIPB) sanctions and conditions mentioned in Press Note 3[8]. These
conditions stipulate that:
1. Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if
produced by the same manufacturer)
2. Products are sold under the same brand internationally
3. Single-brand products include only those identified during manufacturing
4. Any additional product categories to be sold under single-brand retail must first receive
additional government approval
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 brand. For Adidas to sell products
under the Reebok brand, which it owns, separate government permission is required and (if
permission is granted) Reebok products must then be sold in separate retail outlets.
FDI in “multi-brand” retail
While the government of India has also not clearly defined the term “multi-brand retail,” FDI in
multi-brand retail generally refers to selling multiple brands under one roof. Currently, this sector
is limited to a maximum of 49 percent foreign equity participation.
In July 2010, the Department of Industrial Policy and Promotion (DIPP) and the Ministry of
Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The Committee of
Secretaries, led by Cabinet Secretary Ajit Seth, recommended opening the retail sector for FDI
with a 51 percent cap on FDI, minimum investment of US$100 million and a mandatory 50
percent capital reinvestment into backend operations. Notably, the paper does not put forward
any upper limit on FDI in multi-brand retail.
Immediately following the release of this discussion paper, the shares of a number of retail
companies in India grew; domestic retail giant, Pantaloon Retail gained 7 percent on the same
day, while Shoppers Stop, an Indian department store chain and emerging retailer, gained 2.9
percent.
The long-awaited scheme has been sent to the Cabinet for approval, but no decision has yet
been made. There appears to be a broad consensus within the Committee of Secretaries that a
51 percent cap on FDI in multi-brand retail is acceptable. Meanwhile the Department of
Consumer Affairs has supported the case for a 49 percent cap and the Small and Medium
Enterprises Ministry has said the government should limit FDI in multi-brand retail to 18 percent.
In terms of location, the proposed scheme allows investment in towns with populations of at
least 10 lakh (1 million), while retailers with large space requirements may also be allowed to
open shop within a 10 kilometer radius of such cities.
Our view is that while we do expect further liberalization towards foreign investment in the multi-
brand sector, this is highly unlikely to be gazetted until after the next elections, due to be
completed towards the end of 2012. Any additional liberalization of this market will therefore
depend on the political make-up of the next government.
Government “safety valves” on FDI
There is concern about the competition presented to domestic competitors and the
monopolization of the domestic market by large international retail giants. The Indian
government feels that FDI in multi-brand retailing must be dealt with cautiously, given the large
potential scale and social impact.
As such, the government is considering safety valves for calibrating FDI in the sector. For
example:
A stipulated percentage of FDI in the sector could be required to be spent on building
back-end infrastructure, logistics or agro-processing units in order to ensure that the
foreign investors make a genuine contribution to the development of infrastructure and
logistics.
At least 50 percent of the jobs in the retail outlet could be reserved for rural youth and a
certain amount of farm produce could be required to be procured from poor farmers.
A minimum percentage of manufactured products could be required to be sourced from
the SME sector in India.
To ensure that the public distribution system and the Indian food security system, is not
weakened, the government may reserve the right to procure a certain amount of food
grains.
To protect the interest of small retailers, an exclusive regulatory framework to ensure that
the retailing giants do not resort to predatory pricing or acquire monopolistic tendencies.
Benefits of FDI in multi-brand retail
Soaring inflation is one of the driving motives behind this move towards multi-brand retail.
Allowing international retailers such as Wal-Mart and Carrefour, which have already set up
wholesale operations in the country, to set up multi-brand retails stores will assist in keeping
food and commodity prices under control. Moreover, industry experts feel allowing FDI will cut
waste, as big players will build backend infrastructure. FDI in multi-brand retail would also help
narrow the current account deficit.
Additional benefits include moving away from an industry focus on intermediaries and job
creation.
Moving away from intermediary-only benefits
There is broad agreement on the need to improve efficiencies in the household trade of
consumer goods. Competent management practices and economies of scale, joined with the
acceptance of global best practices and modern technology, could immensely recover systemic
competence.
Like their foreign counterparts, Indian customers are entitled to receive quality products,
produced, processed and handled under a hygienic environment through professionally-
managed outlets. Speculative apprehensions that small retailers will be adversely affected are
not reason enough to deny millions of consumers access to products that meet global
standards.
Furthermore, today’s intermediaries amid producers and customers add no value to the
products, adding hugely to final costs instead. By the time products filter through various
intermediaries and into the marketplace, they lose freshness and quality, and often go to waste.
However, intermediaries garner huge profits by distributing these losses between producers and
customers by buying products at low prices from producers, but selling at extremely marked-up
prices to consumers. In an unbalanced system that incorporates multiple intermediaries simply
for logistics, only intermediaries benefit.
With organized retail, every intermediate step – procurement, processing, transport and delivery
– adds value to the product. This happens because it uses international best practices and
modern technology, ensuring maximum efficiency and minimum waste. Organized retail enables
on-site processing, scientific handling and quick transport through cold storage chains to the
final consumer. Once modern retailers introduce an organized model, other vendors, including
small retailers, would mechanically copy this model to improve efficiencies, boost margins and
stay in business. Organized retail would thereby bring more stability to prices, unlike the present
system where hoarding and artificial shortages by profiteering intermediaries push up product
prices.
Job creation
Despite predictions from some analysts that millions of jobs would be lost due to FDI in retail, it
may in fact be the other way around. With the entry of branded retailers, the market will
increase, creating additional employment in retail and other tertiary sectors. Given their
professional approach, organized retailers will allot some quantity of resources towards the
training and development of the resources they employ.
This effect of branded retailing can already be seen with the Bharti-Wal-Mart collaboration,
which has joined forces with state governments to open training and development centers in
Amritsar, Delhi and Bangalore, preparing local youth for jobs in retail. Training is entirely free
and more than 5,600 local youth have already been trained. Retail jobs don’t require higher
education or highly specialized abilities.
No threat to kiranas (mom-and-pop stores)
The Indian retail industry is generally divided into organized and unorganized retailing:
Organized retailing
Organized retailing refers to trading activities undertaken by licensed retailers, those who have
registered for sales tax, income tax, etc. These include corporate-backed hypermarkets and
retail chains, and also privately-owned large retail businesses.
Unorganized retailing
Unorganized retailing refers to the traditional forms of low-cost retailing, for example, local
kirana shops, owner-operated general stores, paan/beedi shops, convenience stores, hand cart
and street vendors, etc.
The question of whether or not organized and unorganized retailing can peacefully co-exist is a
primary concern. While the Indian retail sector is still heavily weighted towards unorganized
retailers, which occupy 97 percent of the market, organized retail is growing quickly. But with a
mere 7 percent of the market, organized retailers are unlikely to drive kiranas (local grocery
stores) out of business. Indian retailers simply lack the deep pockets and in-depth field expertise
required to be on a par with global models. However, the presence of foreign retailers through
joint ventures and other means could speed up the process of transforming India’s retail trade.
Considering that small stores offer customers quick doorstep delivery and even credit
extensions – conveniences that no organized retailer in India has so far matched – local,
unorganized retailers will likely retain a sizeable market share.
The example of China demonstrates clearly that increased FDI in retailing does not necessitate
the complete closure of local retailers. China first allowed FDI in retail in 1992, capping it at 26
percent, while India capped FDI in single-brand retail at 26 percent. Only in 2004 did China
finally permit 100 percent FDI and local Chinese grocery stores have since grown from 1.9
million to more than 2.5 million. Organized retail has just 20 percent market penetration in
China, despite a 20 year lapse since the initial introduction of FDI.
According to the proposed state regulations, the minimum FDI would be US$100 million and
retail stores would only be allowed in cities with more than one million people. Front-end
operations would be allowed only in states that agree to authorize FDI in multi-brand retail. It will
also be mandatory for retailers to source at least 30 percent of the value of manufactured
goods, barring food products, from small and medium-sized, local enterprises.
Such terms will serve as ample safeguards for small retailers. Farmers and small producers will
benefit in the long run from better prices for their products and produce, while consumers
receive higher quality products at lower prices, along with better service.
The advantages outweigh the disadvantages of allowing unrestrained FDI in the retail sector, as
successful experiments in countries like Thailand and China demonstrate. In both countries, the
issue of allowing FDI in the retail sector was first met with incessant protests, but allowing such
FDI led to GDP growth and a rise in the level of employment.
Moreover, in the fierce battle between the advocates and opponents of unrestrained FDI flows
in the Indian retail sector, the impact of the consumer on the outcome of these policy changes
has been largely disregarded. Consumers will ultimately respond to the incentives of
convenience, price, variety and service. Thus, the interests of those in the unorganized retail
sector will not be gravely undermined; rather, the choice to visit a mega shopping complex or a
small retailer/sabjimandi is purely left to the consumer, whose tastes are complex and
constantly changing.
Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, a
specialist foreign direct investment firm with 20 offices throughout Asia, including 5 in India. The
practice advices on foreign direct investment regulatory issues, law, tax, due diligence and
business advisory services. Please contact the firm at [email protected] or visit their web site
here.What is Driving the Growth in Organized Retailing?
• New-Age Young Indians are main benefactors of India's growing economy.
• Joint Venture Activity among brands, retailers, franchisees, investors and malls.
• India on radar of International Retailers.
• Many are in planning stages for Roll-Out in India's primary markets.
• Many Indian Retailers are Developing Store Networks that could potentially be bought by
Internationals for "Turn-Key Entry".
• Occupancy Costs (rents) are seen to be high by Local Indian Retailers.
• Generic Supply of New Malls in size, format, positioning, amenities and merchandise mix.
• Attempts to Create Specialty Malls.
• Shake-Out is Anticipated.
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