INDIAN RETAIL INDUSTRY

Retail Sector is the most booming sector in the Indian economy. Some of the biggest
players of the world are going to enter the industry soon. It is on the threshold of bringing
the next big revolution after the IT sector. Although organized retail market is not so
strong as of now, it is expected to grow manifolds by the year 2010. The sector contributes
10% of the GDP, and is estimated to show 20% annual growth rate by the end of the
decade as against the current growth rate of 8.5%. A CRISIL report says that the Indian
retail market is the most fragmented in the world and that only 2% of the entire retailing
business is in the organized sector. This suggests that the potential for growth is immense.
There are about 300 new malls, 1500 supermarkets and 325 departmental stores currently
being built in the cities across India.
Estimates and predictions for retail sector:

 At present, the industry is estimated to be at more than US$ 400 billion by a study
of McKinsey.
 The Economist Intelligence Unit (EIU) estimates the retail market in India will
increase to US$608.9 billion in 2009 from US$394 billion in 2005.
 KPMG Report says that the organized retail would grow at a higher rate than the
GDP in the next five years.
 The retail sector would generate employment for more than 2.5 million people by
the year 2010, predicts an analysis by Ma Foi Management Consultants Ltd.

EVOLUTION OF INDIAN RETAIL SECTOR

The origins of retailing in India can be traced back to the emergence of Kirana stores and
mom-and-pop stores. These stores used to cater to the local people. Eventually the
government supported the rural retail and many indigenous franchise stores came up
with the help of Khadi & Village Industries Commission. The economy began to open up
in the 1980s resulting in the change of retailing. The first few companies to come up with
retail chains were in textile sector, for example, Bombay Dyeing, S Kumar's, Raymonds,
etc. Later Titan launched retail showrooms in the organized retail sector. With the
passage of time new entrants moved on from manufacturing to pure retailing.
Retail outlets such as Foodworld in FMCG, Planet M and Musicworld in Music,
Crossword in books entered the market before 1995. Shopping malls emerged in the
urban areas giving a world-class experience to the customers. Eventually hypermarkets
and supermarkets emerged. The evolution of the sector includes the continuous
improvement in the supply chain management, distribution channels, technology, back-
end operations, etc. this would finally lead to more of consolidation, mergers and
acquisitions and huge investments.
Phases in the evolution of retail sector

Weekly Markets, Village and Rural Melas

 Source of entertainment and commercial exchange

Convenience stores, Mom-and-pop / Kirana shops

 Neighbourhood stores/convenience
 Traditional and pervasive reach

PDS outlets, Khadi stores, Cooperatives

 Government supported
 Availability/low costs/distribution

Exclusive brand outlets, hypermarkets and supermarkets, department stores and

shopping malls

 Shopping experience/ efficiency

 Modern formats/ international

Modern Format retailers

Supermarkets
Hypermarkets
Department Stores
Specialty Chains
Company Owned Company Operated
Tradiitonal Format Retailers
Kiranas: Traditional Mom and Pop Stores
Kiosks
Street Markets
Exclusive/ Multiple Brand Outlets

Traditional vis-à-vis Modern format Retailers

The retail boom will face a strong competition from the 12 million mom-and-pop stores.
These are easily accessible and provide services like free home delivery and goods at
credit, which is not possible with hypermarkets and supermarkets. Buying from Malls,
Supermarkets and Department stores like Subhiksha, Marks & Spencers, etc. provide a
different environment where one can pick and choose from a variety of products. Owing
to the entry of such big players, the small shopkeepers fear losing their business.
Reliance Retail Ltd. has been inviting such people to join in its Dairy business as
franchisees.

Percentage of Organised Retail across the world

Indian Retail market
Indian retail industry is the fifth largest in the world. Comprising of organized and
unorganized sectors, India retail industry is one of the fastest growing industries in India,
especially over the last few years. Though initially, the retail industry in India was mostly
unorganized, however with the change of tastes and preferences of the consumers, the
industry is getting more popular these days and getting organized as well. With growing
market demand, the industry is expected to grow at a pace of 25-30% annually. The India
retail industry is expected to grow from Rs. 35,000 crore in 2004-05 to Rs. 109,000 crore
by the year 2010.

Indian market has high complexities in terms of a wide geographic spread and
distinct consumer preferences varying by each region necessitating a need for
localization even within the geographic zones. India has highest number of outlets per
person (7 per thousand) Indian retail space per capita at 2 sq ft (0.19 m2)/ person is
lowest in the world Indian retail density of 6 percent is highest in the world. [9] 1.8 million
households in India have an annual income of over 45 lakh[10].

Delving further into consumer buying habits, purchase decisions can be separated into
two categories: status-oriented and indulgence-oriented. CTVs/LCDs, refrigerators,
washing machines, dishwashers, microwave ovens and DVD players fall in the status
category. Indulgence-oriented products include plasma TVs, state-of-the-art home
theatre systems, iPods, high-end digital cameras, camcorders, and gaming consoles.
Consumers in the status category buy because they need to maintain a position in their
social group. Indulgence-oriented buying happens with those who want to enjoy life
better with products that meet their requirements. When it comes to the festival
shopping season, it is primarily the status-oriented segment that contributes largely to
the retailer’s cash register.[11]

While India presents a large market opportunity given the number and increasing
purchasing power of consumers, there are significant challenges as well given that over
90% of trade is conducted through independent local stores. Challenges include:
Geographically dispersed population, small ticket sizes, complex distribution.
The Retail Business in India is currently at the point of inflection. Rapid change with
investments to the tune of US $ 25 billion is being planned by several Indian and
multinational companies in the next 5 years. It is a huge industry in terms of size and
according to management consulting firm Technopak Advisors Pvt. Ltd., it is valued at about
US $ 350 billion. Organised retail is expected to garner about 16-18 percent of the total
retail market (US $ 65-75 billion) in the next 5 years.

India has topped the A.T. Kearney’s annual Global Retail Development Index (GRDI) for the
third consecutive year, maintaining its position as the most attractive market for retail
investment. The Indian economy has registered a growth of 8% for 2007. The predictions for
2008 is 7.9%.[5] The enormous growth of the retail industry has created a huge demand for
real estate. Property developers are creating retail real estate at an aggressive pace and by
2010, 300 malls are estimated to be operational in the country. [6]

With over 1,000 hypermarkets and 3,000 supermarkets projected to come up by 2011, India
will need additional retail space of 700,000,000 sq ft (65,000,000 m2) as compared to today.
Current projections on construction point to a supply of just 200,000,000 sq ft
(19,000,000 m2), leaving a gap of 500,000,000 sq ft (46,000,000 m2) that needs to be filled,
at a cost of US$15–18 billion.[7]

According to the Icrier report, the retail business in India is estimated to grow at 13% from
$322 billion in 2006-07 to $590 billion in 2011-12. The unorganized retail sector is expected
to grow at about 10% per annum with sales expected to rise from $ 309 billion in 2006-07 to
$ 496 billion in 2011-12.[8](

The Indian retail market, which is the fifth largest retail destination globally, has been
ranked as the most attractive emerging market for investment in the retail sector by AT
Kearney's eighth annual Global Retail Development Index (GRDI), in 2009. As per a study
conducted by the Indian Council for Research on International Economic Relations (ICRIER),
the retail sector is expected to contribute to 22 per cent of India's GDP by 2010.

With rising consumer demand and greater disposable income, the US$ 400 billion Indian
retail sector is clocking an annual growth rate of 30 per cent. It is projected to grow to US$
700 billion by 2010, according to a report by global consultancy Northbridge Capital. The
organised business is expected to be 20 per cent of the total market by then. In 2008, the
share of organised retail was 7.5 per cent or US$ 300 million of the total retail market.

A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian
consumer market is likely to grow four times by 2025. Commercial real estate services
company, CB Richard Ellis' findings state that India's retail market has moved up to the 39th
most preferred retail destination in the world in 2009, up from 44 last year.

Banks, capital goods, engineering, fast moving consumer goods (FMCG), software services,
oil, marketing, power, two-wheelers and telecom companies are leading the sales and profit
growth of India Inc in the fourth quarter of 2008-09. India continues to be among the most
attractive countries for global retailers. Foreign direct investment (FDI) inflows as on
September 2009, in single-brand retail trading, stood at approximately US$ 47.43 million,
according to the Department of Industrial Policy and Promotion (DIPP).

India's overall retail sector is expected to rise to US$ 833 billion by 2013 and to US$ 1.3
trillion by 2018, at a compound annual growth rate (CAGR) of 10 per cent. As a democratic
country with high growth rates, consumer spending has risen sharply as the youth
population (more than 33 percent of the country is below the age of 15) has seen a
significant increase in its disposable income. Consumer spending rose an impressive 75 per
cent in the past four years alone. Also, organised retail, which is pegged at around US$ 8.14
billion, is expected to grow at a CAGR of 40 per cent to touch US$ 107 billion by 2013.

The organised retail sector, which currently accounts for around 5 per cent of the Indian
retail market, is all set to witness maximum number of large format malls and branded retail
stores in South India, followed by North, West and the East in the next two years. Tier II
cities like Noida, Amritsar, Kochi and Gurgaon, are emerging as the favoured destinations for
the retail sector with their huge growth potential.

Further, this sector is expected to invest around US$ 503.2 million in retail technology
service solutions in the current financial year. This could go further up to US$ 1.26 billion in
the next four to five years, at a CAGR of 40 per cent.

India has emerged the third most attractive market destination for apparel retailers,
according to a study by global management consulting firm AT Kearney. The Northbridge
Capital report states that apparel is the "largest organised retail category", accounting for 39
per cent of the organised market. It is growing at the rate of 12 to 15 per cent annually.
Organised apparel retail is projected to touch US$ 200 million by 2010 from the current
worth of US$ 120 million, the report noted.

Experts agree that apparel, along with food and grocery, is leading the growth of organised
retailing in India. The results of the past quarter support these findings.

Buoyed by improved consumer spending, sales of listed retailers increased by 12 per cent in
the September 2009 quarter compared with the same period in 2008. This is higher than the
8.2 per cent posted in the June 2009 quarter. While the previous quarter saw value retailers
such as Koutons Retail and Pantaloon leading sales recovery, this time around, sales of
lifestyle and premium retailers led the growth trend. Two out of every three retailers
managed an increase of at least 10 per cent, compared to about one in three in the June
2009 quarter.

Premium players such as Shoppers' Stop and Gitanjali Gems clocked strong growth of 11
and 31.7 per cent, respectively. Shoppers' Stop saw same-store sales growth move back into
positive territory at 1.8 per cent. Operating profit margins moved up steadily to 9.93 per
cent, almost a 122 per cent improvement since the December 2008 quarter.

 Luxury Goods Retail, which currently sells its products in India under a franchise
agreement, has been allowed to directly retail Gucci products in the country. Gucci
 Group NV, Netherlands is investing US$ 225,867 to pick up 51 per cent stake in the
venture.
 Australia's Retail Food Group is planning to enter the Indian market in 2010. It has
ambitious investment plans which aim to clock revenue of US$ 87 million from the
country within five years from start of operations. In 20 years, they expect the Indian
operations to be bigger than their Australian business.
 Lifestyle International, part of the Dubai-based US$ 1.5 billion Landmark Group,
plans to have over 50 stores across India by 2012–13. These will include 35 Lifestyle
stores for retailing apparel, cosmetics and footwear, besides 15 Home Centres that
sell home furnishing goods.
 Watch maker, Timex India, is looking at increasing its presence in the country by
adding another 52 stores by March 2011 at an investment of US$ 1.3 million taking
its total store count to 120. The company has recorded revenue of US$ 15.9 million
and a net profit of US$ 1.2 million, during the first six months of the current fiscal,
ending September 30, 2009.
 Wills Lifestyle plans to expand its operations by opening 100 new stores in the next
three years. It also plans to concentrate on online buyers.
 Pantaloon Retail India (PRIL) is planning to invest US$ 77.88 million this fiscal to add
up to 2.4 million sq ft retail space at its existing operations. Pantaloon Retail is also
looking to hive off its value retail chain, Big Bazaar, into a separate subsidiary, which
may eventually go for an initial public offer (IPO). PRIL proposes to open 155 Big
Bazaar stores by 2014, increasing its total network to 275 stores.
 Aditya Birla Retail which operates the More chain of supermarkets and
hypermarkets is scaling up its private labels business as an independent strategic
business unit (SBU) and profit centre. This may be spun off as a separate entity as
private labels business account for over 19-20 per cent sales of More supermarkets
and hypermarkets.

Retail formats in India:-

Hyper marts/supermarkets: large self-servicing outlets offering products from a variety of

categories.

 Mom-and-pop stores: they are family owned business catering to small sections;
they are individually handled retail outlets and have a personal touch.
 Departmental stores: are general retail merchandisers offering quality products and
services.
 Convenience stores: are located in residential areas with slightly higher prices goods
due to the convenience offered.
 Shopping malls: the biggest form of retail in India, malls offers customers a mix of all
types of products and services including entertainment and food under a single
roof.
 E-trailers: are retailers providing online buying and selling of products and services.
  Discount stores: these are factory outlets that give discount on the MRP.
 Vending: it is a relatively new entry, in the retail sector. Here beverages, snacks and
other small items can be bought via vending machine.
 Category killers: small specialty stores that offer a variety of categories. They are
known as category killers as they focus on specific categories, such as electronics
and sporting goods. This is also known as Multi Brand Outlets or MBO's.
 Specialty stores: are retail chains dealing in specific categories and provide deep
assortment. Mumbai's Crossword Book Store and RPG's Music World are a couple
of examples.

Major Indian Retailers:-

Indian apparel retailers are increasing their brand presence overseas, particularly in
developed markets. While most have identified a gap in countries in West Asia and Africa,
some majors are also looking at the US and Europe. Arvind Brands, Madura Garments,
Spykar Lifestyle and Royal Classic Polo are busy chalking out foreign expansion plans
through the distribution route and standalone stores as well. Another denim wear brand,
Spykar, which is now moving towards becoming a casualwear lifestyle brand, has launched
its store in Melbourne recently. It plans to open three stores in London by 2008-end. [13]

The low-intensity entry of the diversified Mahindra Group into retail is unique because it
plans to focus on lifestyle products. The Mahindra Group is the fourth large Indian business
group to enter the business of retail after Reliance Industries Ltd, the Aditya Birla Group,
and Bharti Enterprises Ltd. The other three groups are focusing either on perishables and
groceries, or a range of products, or both.

 Vivek Limited Retail Formats: Viveks, Jainsons, Viveks Service Centre, Viveks Safe
Deposit Lockers
 PGC Retail -T-Mart India, Switcher , Respect India , Grand India Bazaar ,etc.,
 REI AGRO LTD Retail-Formats:6TEN Hyper & 6TEN Super
 RPG Retail-Formats: Music World, Books & Beyond, Spencer’s Hyper, Spencer’s
Super, Daily & Fresh
 Pantaloon Retail-Formats: Big Bazaar, Food Bazaar, Pantaloons, Central, Fashion
Station, Brand Factory, Depot, E-Zone etc.
 The Tata Group-Formats: Westside, Star India Bazaar, Steel junction, Landmark, Titan
Industries with World of Titans showrooms, Tanishq outlets, Chroma.
 K Raheja Corp Group-Formats: Shoppers Stop, Crossword, Hyper City, Inorbit
 Lifestyle International-Lifestyle, Home Centre, Max, Fun City and International
Franchise brand stores.
 Pyramid Retail-Formats: Pyramid Megastore, TruMart
 Nilgiri’s-Formats: Nilgiris’ supermarket chain
 Subhiksha-Formats: Subhiksha supermarket pharmacy and telecom discount chain.
 Trinethra- Formats: Fabmall supermarket chain and Fabcity hypermarket chain
 Vishal Retail Group-Formats: Vishal Mega Mart
 BPCL-Formats: In & Out
  Reliance Retail-Formats: Reliance Fresh
 Reliance ADAG Retail-Format: Reliance World
 German Metro Cash & Carry
 Shoprite Holdings-Formats: Shoprite Hyper
 Paritala stores bazar: honey shine stores
 Aditya Birla Group - More Outlets

Pantaloon:

Pantaloon Retail (India) Limited is India's leading retailer that operates multiple retail
formats in both the value and lifestyle segment. Pantaloon has ushered a retail revolution in
India and its founder Kishore Biyani is known as India's "King of Retail". Pantaloon's
headquarter is in Mumbai. The company currently operates over 5 million square feet of
retail space and has plans to increase it to 30 million sq. ft by 2011. Pantaloon has plans to
open over 3000 new stores by 2010.

Pantaloon's origin can be traced to 1987 when the company was incorporated as Manz
Wear Private Limited. The company launched Pantaloons trouser, India's first formal trouser
brand. In 1992, Pantaloon launched its IPO. In 1994, The Pantaloon Shoppe - exclusive
menswear store in franchisee format was launched across the country. Pantaloon started
distribution of distribution of branded garments through multi-brand retail outlets across
the nation. In 2001, Big Bazaar, India's first hypermarket chain was launched. In 2002, Food
Bazaar, the supermarket chain was launched. In 2006, Future Capital Holdings, the
company's financial arm launched real estate funds, "Kshitij" and "Horizon" and private
equity fund "Indivision". The company is also planning forays into insurance and consumer
credit.

Pantaloon Retail is the flagship company of Future Group. The lines of business of Future
Group are:

E-commerce: Pantaloon's website Futurebazaar.com has revolutionized the e-commerce

business in India. It offers a wide range of products at affordable prices. It has been named
as Best Indian Website 2007 in the Shopping category by PC World.

Food: In food business, the group offers a host of options. Food Bazaar - a chain of large
supermarkets; Brew Bar - a beer bar; café Bollywood - a national chain of eateries; Chamosa
- a pan-Indian chain of snack counters, and Sports Bar - a bistro focused on the world of
sports.

Fashion: The group offers a variety of options in fashion. Its brands include aLL, Blue Sky,
Central, Etam, Fashion Station, Gini & Jony, Navaras, Pantaloons, and Top 10.

Home & Electronics: Options include: Collection i - a lifestyle furniture store; Electronics
Bazaar - offers branded electronic goods and appliances; e-zone - trendiest electronics
items; Furniture Bazaar - entire range of Home Furniture; Home Town - one stop destination
for all the home needs.

Leisure & Entertainment: Options are: Bowling Co. - state-of-the-art premium family
entertainment centre, offering multiple, novel and unique leisure and entertainment
options; F 123 - offers a wide range of gaming options ranging from bowling and pool to
redemption and interactive video games to bumper cars.

Wellness & Beauty: Options are: Health Village - a state-of-the art spa and yoga centre; Star
& Sitara: Beauty salon for men and women; Tulsi - provides access to the best allopathic,
ayurvedic and homeopathic medicinal products; Turmeric - offers beauty products like
colour cosmetics, fragrances, herbal and specialty skin items, hair products and bath
accessories.

Books & Music: Future Group's brand - "Depot" offers Books, CDs, and stationery items.

Major Achievements of Pantaloon Retail

 Chosen as International Retailer for the Year 2007

 Chosen as Emerging Market Retailer of the Year 2007
 Best Employers in India (Rank 14th) in the Hewitt Best Employers 2007 survey.
 Best Managed Company in India (Mid-cap) for the year 2006.
 Won Images Retail Awards 2006 for Best Value Retail Store, Best Retail Destination,
and Best Food & Grocery Store.

TataGroup

Tata group is another major player in Indian retail industry with its subsidiary Trent, which
operates Westside and Star India Bazaar. Established in 1998, it also acquired the largest
book and music retailer in India ‘Landmark’ in 2005. Trent owns over 4 lakh sq. ft retail
space across the country.

RPG Group
The history of RPG Enterprises goes back to the 19th century. In 1979 Mr. RP Goenka took
the initiative to set up RPG Enterprises. Presently it has a turnover of US$ 1.65 billion (Rs.
7472 crore) and assets worth US$ 1.8 billion. Among the fastest growing groups in India, it is
operating successfully through more than 20 companies in 7 business sectors, namely Retail,
IT & Communications, Power, Transmission, Entertainment, Life sciences and Tyres.

The organization believes in responding to a business opportunity, making optimum

utilization of resources, and inspiring people to foster teamwork. Quality is another
important parameter for the enterprise to improve continuously and satisfy customers in
the best possible manner.
Performance, excellence and entrepreneurship are ingrained in the organization as core
values. It is a place where the employees are aware of the Corporate Social Responsibility,
involving in various social activities, sports and arts. The organization operates through
various retail formats such as supermarkets, hypermarkets, music stores and health and
beauty products outlet.
Its largest chain of Spencers offers a complete array of products and durables. It is operating
through 80 stores spread in 20 cities, and is still growing rapidly. Every month nearly 2.6
million people walk in its stores. The stores are located in Bangalore, Mumbai, Delhi,
Chennai, Trivandrum, Hyderabad, Faridabad, Vizag, Aurangabad, Pune, Ghaziabad, Cochin,
and many more.

The music store of RPG Enterprises - MusicWorld delivers its products through 170 outlets
spread in 21 cities. The enterprise has also set up a training institute for Front Line Staff and
Staff Managers known as RPG Institute of Retail Management (RIRM).

Reliance

Reliance is one of the biggest players in Indian retail industry. More than 300 Reliance Fresh
stores and Reliance Mart are quite popular in the Indian retail market. It's expecting its sales
to reach Rs. 90,000 crores by 2010.

AV Birla Group

AV Birla Group has a strong presence in Indian apparel retailing. The brands like Louis
Phillipe, Allen Solly, Van Heusen, Peter England are quite popular. It's also investing in other
segments of retail. It will invest Rs. 8000-9000 crores by 2010.

Scope of the Retail Sector

Retail is clearly the sector that is poised to show the highest growth in the next five
years. The sector is set for a revolution, as both the present players and new entrants are
gearing up to explore the market. This sector contributes 10% of India's GDP and the
 current growth rate is 8.5%. The present size of the organized retailing sector is
approximately 3% and is expected to grow to 25-30% by the year 2010. There are about
300 new malls, 1500 supermarkets and 325 departmental stores currently under
construction. Many players are coming up with huge investments, due to which the
present 12 million mom-and-pop shops and kirana stores fear losing their business. Most
predictions say that the sector might reach to US$ 400-600 billion by the year 2010.

Global retail giants such as Wal-Mart, Tesco, Germany's Metro AG and many others are
ready to enter the retail markets. The rising demand of branded products and increase in
purchasing power have lured these companies to enter the market.

Retail Landscape

Modern retail development in India is focused on the following cities:

West
 Mumbai
 Pune
 Ahmedabad
North
 Delhi and the National Capital region
South
 Chennai
 Bangalore
 Hyderabad
East
 Kolkata

Foreign Direct Investment in Retailing in India – Its Emergence &

Prospects

Abstract

In recent years the destination sectors in FDI have became more varied. FDI inflows have
shifted from infrastructure, natural resources and export driven manufacturing to other
areas such as retailing, tourism, construction and off shore services. A World Bank study
showed that cumulative FDI inflows to the retail sector in the 20 largest developing
countries amounted to US$ 45 billion in 1998-2002 (about 7 per cent of the total of these
countries). The study showed that after liberalization; countries such as Brazil, Poland and
Thailand have received significant FDI in retailing. In spite of the recent developments in
retailing and its immense contribution to the economy, retailing continues to be are the
least evolved industries and the growth of organised retailing in India has been much slower
as compared to rest of the world. Over a period of 10 years, the show of organised retailing
in total retailing has grown from 10 per cent to 40 percent in Brazil and 20 percent in China,
while in India it is only 2 per cent (between 1995-2005). One important reason for this is
that retailing is one of the few sectors where foreign direct investment is not allowed.
Within the country, there have been protests by trading associations and other stakeholders
against allowing FDI in retailing. On the other hand, the growing market has attracted
foreign investors and India has been portrayed as an important investment destination for
the global retail chains. The present paper attempts to analyse the reason why foreign
retailers are interested in India, the strategies they are adopting to enter India and there
prospects in India.

After the waves of globalisation, liberalisation and privatisation marketing scenario

particularly retailing has changed radically. These changes have resulted in emergence of
new environment for buyers’ behaviour and purchasing habits. The upper and upper middle
strata of the society now prefers to purchase well established branded goods from standard
showrooms and it has transformed the entire picture and perception not only in the metro
cities but almost in all big cities of our country. It is worth mentioning that retailing in India
has been hailed as one of the sun-rise sectors in the economy. According to A. T. Kearney, a
well known International Management Consultant, “India is the second most attractive
retail designation globally, among thirty emergent markets.” Till now unorganised retailing
sector was dominating retail trade in India by constituting 98% of all retailing trade but now
notonly traditional Indian retailers but giant Indian retailers like Reliance has entered in the
area and is planning to expand its activities in this sector in a big wag. Even world renowned
retailing organisation like Wal-Mart has decided to enter in India via joint venture with
Bharti and French retailer Carrefour is busy in chalking out strategy to enter the hyper
market and supermarket retail format in India through Dubai based retail major Landmark
group. In this context an effort has been made in this paper to review the emergence of
global retailers in India, to examine the govt. policy relating to FDI in retailing and to
evaluate the prospects of global retailing in India.

Why Global Retailers are Interested in India?

More specifically the global players are interested in India due to following reasons:
I) Strategic Location & Geography: India enjoys unique geographical
advantage. It is strategically located in Asia with access to all leading markets of the World.
With total area of 32, 87,590 Sq. Km, Coastline of 7000 Km and borders with six countries
India becomes most promising destination for the foreign direct investment.
II) Versatile Demographics: Demographically with a population of more than
1.1 billion and diverse culture, India is a land of all seasons. India presents a real
cosmopolitan population with diverse religions and culture. Hinduism, Buddhism, Jainism,
Sikhism, Christianity and Islam are the main religions of India. This variety of religions
provides India with a diverse culture. Besides, India has versatile population of urban and
rural nature. This versatility of population makes India a ready made market for foreign
retailers.
III) Vast growing Economy: On economic front, India the largest democracy of
the world, have a stable Govt. with robust programme of economic reforms. India with a
foreign exchange reserve of more than US $120 billion, FDI of more than US $9.9 billion
,average GDP growth of more than 7% per annum, rupee appreciation Vs U.S dollar of more
than 2% in last two years and with a rapidly growing investment in infrastructure has all the
ingredients of a emerging economic super power. India is tipped to be third largest
economy in terms of GDP by the year 2050 (Table 1)

Table 1: Forecast of GDP ($ Trillion)

Country 2010 2050

China 3.0 44.5
USA 13.3 35.2
India 0.9 27.8
Japan 4.6 6.7
Brazil 0.7 6.1
Russia 0.8 5.9
UK 1.9 3.8
Germany 2.2 3.6
Italy 1.3 2.1

Source: McKinsey Quarterly Nov.04

In such a scenario every multinational aims to set up a base in India, not to

participate in Indian growth story, rather to build their own future.
IV) Retailing: The Emerging Revolution: Retailing is the largest private
industry in India and second largest employer after agriculture. The sector contributes to
around 10 percent of GDP. With over 12 million retail outlets, India has the highest retail
outlets density in the world. This sector witnessed significant development in the past 10
years from small unorganized family owned retail formats to organized retailing.
Liberalization of the economy, rise in per capita income and growing consumerism has
encouraged large business and venture capitalist in investing in retail infrastructure. The
importance of retail sector in India can be judged from following facts (a) Retail sector is the
largest contributor to the Indian GDP (b) The retail Sector provides 15% employment (c)
India has world largest retail network with 12 million outlets (d) Total market size of
retailing in India Is U.S $ 180 billion (e) Current Share of Organized Retailing is just 2%
which comes around to $3.6 trillion (f) Organized retail sector is growing @ 28% per annum.
V) Indian Retailing: Opportunities Unexplored: India is sometimes referred to
as the nation of shopkeepers. This is because the country has the highest density of retail
outlets - over 12 million. However, unlike most developed and developing countries, Indian
retail sector is highly fragmented and bulk of the business is in the unorganized sector. As
compared to China (Table 2) the presence of global players in India is very less.

Table 2: Number of Foreign Retailers in India & China

Retailer China India

Retailer China India

Wal-Mart 40 -------
Carrefour 53 -------
Tesco 30 -------
 Metro 21 02
KFC Over 1000 04
Starbucks 70 -------
McDonald’s 580 47
Pizza Hut 110 75
Louis Vuitton 06 02
Prada 10 -------
B&Q 20 -------
Hugo Boss 60 02
Source: McKinsey Quarterly Nov.04

India in such a scenario presents following facts to foreign retailers:

 There is a huge, huge industry with no large players. Some Indian large players have
entered just recently like Reliance, Trent

 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 the above, 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.

Major Global Players in Retailing: The top 10 global retailers together with their
percentage of sale from grocery and the percentage of sales in domestic and foreign
markets
for the year 2008 are given in Table 3.

Table 3: Top 10 Global Retailers with their Sales

Retail Name of the Country of 2008 Group 2008 Retail 2008 Group 2003-2008
sales Company Origin Revenue Sales (U.S Net Income Retail Sales
Rank (U.S $mil) $mil) (U.S $mil) CAGR (%)
1 Wal-Mart U.S 405607 401244 13899 9.4
2 Carrefour France 129809 127958 2264 4.3
3 Metro Germany 99986 99004 824 4.8
4 Tesco U.K 96210 96210 3836 12.0
5 Schwarz Germany 79924 79924 N/A 12.3
Unternehmens
Treuhand
6 The Kroger U.S 76000 76000 1249 7.2
7 The Home U.S 71288 71288 2260 1.9
Depot
8 Costco U.S 70977 70977 1283 11.2
Wholesale
9 Aldi gmbh & Co. Germany 66063 66063 N/A 5.1
10 Target Corp. U.S 64948 62884 2214 6.1
 Liberalization of the Indian economy and rationalisation of business procedures have
already ensured a high economic growth with a rapidly expanding base for the
manufacturing and hi-end services sectors. Fresh avenues for gainful employment to a
predominantly young and talented population have created high disposable incomes that
translate in to higher consumption and thus better opportunities for all verticals of Retail to
flourish.

Slowdown in Indian Economy – myth or reality for retail players?

The current slow down in the Indian economy notwithstanding, the retail segment in the
country seems to be in for a big time expansion led by most major Indian business majors
and global players. Even though the CB Richard Ellis report released in April 2008, placed
India at a dismal number 44 in the list of preferred destinations for global retailers looking
to expand, fresh announcements in the media belie this fact. However, going through these
years of learning nearly all stake holders in the industry are re-considering their retail plans.
A need for consolidation in retail business is evident and to give it effect many have hit the
drawing boards again – not necessarily means that there is any down turn in the industry. In
spite of the fast track growth of the retail industry, India is still undergoing through the
initial development phase of modern retail

Private Consumption & Retail

The country’s dynamic retail landscape presents a grand opportunity to investors from
across the globe, to use India as a strategic business hub. With the changing face of retail,
the Indian consumer is in for a rapid transformation. With retail spending growing at double
digit, Private Final Consumption Expenditure (PFCE) at current prices was estimated at Rs.
26,07,584 crore in 2007-08 as against Rs. 23,12,105 crore in 2006-07.

INDIAN ORGANISED RETAIL MARKET(in Crores)

RETAIL
MARKET (in
Crores)
Retail Segments 2006 2007 Growth 2006 2007 Growth
2007>20 2007>20
06 (in %) 06 (in %)
Clothing, Textiles & Fashion Accessories 113,500 131,300 15.7 21,400 29,800 39.3

Jewellery 60,200 69,400 15.3 1,680 2,300 36.9

Watches 3,950 4,400 11.4 1,800 2,150 19.4

Footwear 13,750 16,000 16.4 5,200 7,750 49.0

Health & Beauty Care Services 3,800 4,600 21.1 400 660 65.0

Pharmaceuticals 42,200 48,800 15.6 1,100 1,540 40.0

 Consumer Durables, Home 48,100 57,500 19.5 5,000 7,100 42.0
Appliances/equipments

Mobile handsets. Accessories & Services 21,650 27,200 25.6 1,740 2,700 55.2

Furnishings, Utensils, Furniture-Home & 40,650 45,500 11.9 3,700 5,000 35.1
Office

Food & Grocery 743,900 792,000 6.5 5,800 9,000 55.2

Out-of-Home Food (Catering) Services 57,000 71,300 25.1 3,940 5,700 44.7

Books, Music & Gifts 13,300 16,400 23.3 1,680 2,200 30.9

Entertainment 38,000 45,600 20.0 1,560 2,400 53.8

TOTAL 1,200,000 1,330,000 10.8 55,000 78,300 42.4

As per the Images F&R Research estimates for India Retail Report the Indian Retail market
stood at Rs.1,330,000 crore in 2007 with annual growth of about 10.8 per cent. Of this, the
share of organised Retail in 2007 was estimated to be only 5.9 per cent, which was
Rs.78,300 crore. But this modern retail segment grew at the rate of 42.4 per cent in 2007,
and is expected to maintain a faster growth rate over the next three years, especially in
view of the fact that major global players and Indian corporate houses are seen entering
the fray in a big way. Even at the going rate, organised retail is expected to touch
Rs.2,30,000 cr (at constant prices) by 2010, constituting roughly 13 per cent of the total
retail market.
The consumer spending is ultimately pushing the economy into a growth-and-liberalisation
mode. The Indian market is becoming bolder by the day, with the economy now expected to
maintain its growth at over 8-9 per cent and average salaries being hiked by about 15 per
cent, there will be lot more consumption.
A short recount of the factors that have earned India the top spot among the favoured retail
destinations:

HEALTHY INVESTMENT CLIMATE

A ‘Vibrant Economy’, India topped A T Kearney’s list of emerging markets for retail
investments for three consecutive years and stood 2nd only behind Vietnam this year. The
2nd fastest growing economy in the world, the 3rd largest economy in terms of GDP in the
next 5 years and the 4th largest economy in PPP terms after USA, China & Japan, India is
rated among the top 10 FDI destinations.
Barring recent political disturbances, India has been sailing smooth with 2nd stage reforms
in place, India can be reasonably proud of having put in place some of the most widely
accepted Corporate Ethics (Labour Laws, Child Labour Regulations, Environmental
Protection Lobby, Intellectual Property Rights, and Social Responsibility) and major tax
reforms including implementation of VAT, all of which make India a perfect destination for
business expansion.
In terms of international tourist spending, India is the fastest-growing market in Asia Pacific,
according to the Visa Asia Pacific release. The economy has been growing at about 9 per
cent a year, which shows that India’s growth rate can actually exceed that of China by 2015.
The Indian economy is expected to grow larger than Britain’s by 2022 and Japan’s by 2032,
to become the third-largest economy in the world after China and US, and finally become
the second largest economy after China by 2050, so the global economic forecasts say.
A report by investment banker Goldman Sachs, credits India with the potential to deliver the
fastest growth over the next 50 years with an average rate of more than five per cent a year
for the entire period. All these are clear portends in terms of investments and returns. Total
FDI (foreign direct investment) inflow in 2007-08, was to the tune of USD25 billion – up 56%
over previous year - with investments in infrastructure development and capital market
continuing to flow in at a rapid pace.
To sustain an ambitious GDP growth target of nine per cent per annum, India needs to
invest around USD 500 billion in development of Infrastructure over the next five years. Of
this, about USD150 billion is expected to come from foreign investment. Indian retail
industry itself has attracted total investment of over Rs.20,000 crore in creating
infrastructure, systems & shop-fit.
At the heart of the India growth story is its population, the generators of wealth, both as
producers and consumers. With the largest young population in the world - over 890 million
people below 45 years of age, India indeed makes a resplendent market. The country has
more English speaking people than in the whole of Europe taken together. Its 300 million
odd middle class, the “Real” consumers, has attracted the attention of the world, and as the
economy grows so does India's middle class. It is estimated that 70 million Indians earn a
salary of over USD 19,500 a year, a figure that is set to rise to 140 million by 2011. The
number of effective consumers is expected to swell to over 600 million by this time –
sufficient to establish India as one of the largest consumer markets of the world.

Govt to keep a tab on FDI in Wholesale Retail:

The department of Industrial policy and Promotion(Dipp) under the ministry of

THE RETAIL REVOLUTION

In this land of 15 million retailers, most of them owning small mom and pop outlets, we also
have a modern retail flourishing like never before. There is little room for conflict as
evidenced from the fact that India presents a unique case of consumption-driven economy:
while the US reels under recession, where supply clearly outstrips demand, India confronts
inflation, where Industry and retailers are as yet unable to provide what the consumer
demands.
Over the last few years Indian retail has witnessed rapid transformation in many areas of
the business by setting scalable and profitable retail models across categories. Indian
consumers are rapidly evolving and accepting modern retail formats. New and indigenised
formats such as departmental stores, hypermarkets, supermarkets, specialty and
convenience stores, and malls, multiplexes and fun zones are fast dotting the retail
landscape.

THE INDIAN RETAIL MARKET SEGMENTS

The Indian retail market has been gaining strength, riding on the sound vibes generated by
a robust economy that has given more disposable incomes in the hand of the consumer who
will keep demanding better products and services, and a better shopping environment.
In the overall Retail pie Food and Grocery was the dominant category with 59.5 per cent
share, valued at Rs.792,000 crore, followed by Clothing and Accessories with a 9.9 per cent
share at Rs.131,300 crore. Interestingly, out-of-home food (catering) services (Rs.71,300
crore) has overtaken Jewellery (Rs.69,400 crore) to become the third largest retail category,
with a 5.4 per cent market share – this largely reflects the massive employment
opportunities to youngsters in the services sector and accompanying changes in consumer
lifestyles.

Consumer durables (Rs.57,500 crore) is the fifth largest retail category followed by Health &
Pharmaceuticals (Rs.48,800 crore), Entertainment (Rs.45,600 crore), Furniture, Furnishings
& Kitchenware (Rs.45,500 crore), Mobiles & Accessories (Rs.27,200 crore), Leisure retail
(Rs.16,400 crore), Footwear (Rs.16,000 crore), Health & Beauty Care services (Rs.4,600
crore) and Watches & Eyewear (Rs.4,400 crore) in the order.

In the Organised retail segment, the picture is different altogether. Clothing & Fashion
Accessories is the largest category with 38.1 per cent of the market share, valued at
Rs.29,800 crore, followed by Food & Grocery accounting for 11.5 per cent of the organised
retail market at Rs.9,000 crore , Footwear with 9.9 per cent of the organised retail market
share at Rs.7,750 crore, Consumer Durables with 9.1 per cent market share at the fourth
place (Rs.7,100 crore), and Out-of-home food (catering) services and Furniture, Furnishings
& Kitchenware retail in the order.

The mobile & accessories retail market has shown fastest growth in 2007 (25.6%) over the
previous year, the other two prominent categories being out-of-home food (catering)
services where growth was 25.1 per cent and books, music & gifts leisure category which
achieved 23.3 per cent growth.

India’s biggest USP and asset base is its youthful population, whose appetite for leisure and
entertainment is galloping at 14 per cent p.a. With the rapid addition of malls with
multiplexes there is a coming together of leisure retail, cinema and gaming. It is indeed
difficult to analyze each of these components in isolation. All players are after all trying to
get to capture a share of consumer’s mind – his time and money. As the consumer’s spend
on leisure and entertainment increases, the mix of his spends is going through a churn like
never before. Leisure and entertainment are recession proof. The affluence across the
country has touched a large part of the population and there is no looking back. Multiplexes,
leisure retailers across books, music, gaming all form a shared existence and whilst the
shares of the pie keep shifting the overall leisure and entertainment business is well on its
way to a Rs. 60,000 Crore mark by 2010-11.
In the organised retail segment, however, the fastest growth was recorded in the tiny heath
& beauty care services category (Rs.660 crore), which grew at the rate of 65 per cent in
2007 over the previous year – again a reflection of rise in services sector employment that
demands proper grooming. The second fastest growing organised retail category is that of
Entertainment (53.8%), followed by the mobile phones & accessories and the food &
grocery retail categories, both of which achieved 55.2 per cent growth in 2007.

Much of the stupendous growth opportunity in Catering services (25.1%) and leisure retail
(23.3%) categories was utilised by the unorganised retailers because organised players could
not keep up to the desired growth momentum. A closer study of the retail growth story at
constant prices shows that in both these categories growth of organised retail was higher in
2006 (41.7% and 26.1% respectively) as compared to 2007 (37% and 25%).

At constant prices, growth in the fashion & accessories retail category, both in the overall
market and the organised retail segment, have been consistently positive since 2004: while
the overall market grew 12.8 per cent in 2007, the organised segment grew 35.5 per cent.

In jewellery retail, the overall market growth was higher in 2007 (9.6%) as compared to the
previous year (9.2%) but growth in organised retail was slightly at a lower pace in 2007
(31%) as compared to the previous year.
The overall market growth in the timewear category has declined from 10.7 per cent in 2005
to 9.7 per cent in 2006 and further down to 8.9 per cent in 2007. However, growth in
organised retail was higher in 2007 (16.6%) as compared to 2006 (14.8%). Popularity of
mobile phones is to a large extent responsible for the dampening of the overall market
growth in this category while the renewed enthusiasm in the organised segment is on
account of the fillip from luxury brands and offerings that are positioned more as a hi-end
lifestyle statement than on the functionality aspect of the product.
Footwear retail, the overall market as well as its organised segment, has grown faster year
after year but growth in 2007 was especially remarkable: the overall market grew 12 per
cent in 2007 as against a 9.2 per cent growth in 2006 while the organised segment grew
42.3 per cent and 36.4 per cent respectively for the two years. The global brands have
actually turned the heat on, and the domestic brands too appear to have accepted the
challenge in the true spirit.

Growth in the health and beauty care category has been remarkable in 2007, though the
organised segment growth in 2007 (57.5%) was slightly lower as compared to 2006 (59.1%).
The demand is stupendous but organised players have hardly much to boast of in terms of
innovative concepts and global standards when it comes to providing the customers with an
experience that is superior and radically different from what the unorganised segment
offers. This category needs to be positioned as a “wellness” category that provides
individualised services to customers with synergies of health & beauty care,
pharmaceuticals and specialised clinical services – all at one place.
Another category that merits special mention is Furnishings and Furniture retail, where the
overall market grew at seven per cent in 2007 as compared to just 3.2 per cent in 2006 –
thanks to the housing sector boom. The organised segment also grew faster at 29.7 per cent
in 2007 as compared to 23.1 per cent the previous year, but this Rs.45,500 crore category
calls for better attention from organised players. Is India ready for ready-to assemble
furniture? May be not but surely the market will change in next couple of years. Global
players need to understand that Indian homes are different and so are the Indian
environments, maintenance standards. At present most large players entering this segment
are busy experimenting and in the process have lost monies too.

Consumer durables and the mobile phone & accessories categories have both grown faster
in 2007 as compared to 2006. At constant prices, the overall food & grocery retail market
grew slightly higher at 2.3 per cent in 2007 as compared to a 2.2 per cent annual growth in
the previous two years. But the organised retail segment in this category is simmering in the
true sense – a 50 per cent growth in 2007 as compared to 42.9 per cent in 2006, and lot
more fireworks can be expected this year and the years ahead. Valued at Rs.9,000 crore,
this organised market constitutes barely 1.1 per cent of the total food & grocery retail
market.

Timewear (48.9%) and Footwear (48.4%) are the most organised of all retail categories.
Clothing & fashion accessories retail comes next with the organised segment controlling
22.7 per cent of the market.
 SHARE OF ORGANISED RETAIL TO TOTAL MARKET

% Organised
Retail Segments

2004 2005 2006 2007

Clothing, Textiles & Fashion Accessories 13.6% 15.8% 18.9% 22.7%

Jewellery 2.0% 2.3% 2.8% 3.3%

Watches 39.6% 43.5% 45.6% 48.9%

Footwear 25.0% 30.3% 37.8% 48.4%

Health & Beauty Care Services 6.0% 7.6% 10.6% 14.3%

Pharmaceuticals 1.8% 2.2% 2.6% 3.2%

Consumer Durables, Home 7.8% 8.8% 10.4% 12.3%

Appliances/equipments

Mobile handsets. Accessories & Services 6.5% 7.0% 8.0% 9.9%

Furnishings, Utensils, Furniture-Home & 6.7% 7.6% 9.1% 11.0%

Office

Food & Grocery 0.5% 0.6% 0.8% 1.1%

Out-of-Home Food (Catering) Services 5.7% 5.8% 6.9% 8.0%

Books, Music & Gifts 9.8% 11.7% 12.6% 13.4%

Entertainment 2.6% 3.3% 4.1% 5.3%

 TOTAL 3.0% 3.6% 4.6% 5.9%

Arguments in favour of FDI in Retailing

FDI in retailing is favoured on following grounds:

(1) The global retailers have advanced management know how in merchandising and
inventory management and have adopted new technologies which can significantly
improve productivity and efficiency in retailing.
(2) Entry of large low-cost retailers and adoption of integrated supply chain management by
them is likely to lower down the prices.
(3) FDI in retailing can easily assure the quality of product, better shopping experience and
customer services.
(4) They promote the linkage of local suppliers, farmers and manufacturers, no doubt only
those who can meet the quality and safety standards, to global market and this will ensure a
reliable and profitable market to these local players.
(5) As multinational players are spreading their operation, regional players are also
developing their supply chain differentiating their strategies and improving their operations
to counter the size of international players. This all will encourage the
investment and employment in supply chain management.
(6) Joint ventures would ease capital constraints of existing organised retailers and
(7) FDI would lead to development of different retail formats and modernisation of the
sector.

Arguments against FDI in Retailing

Many trading associations, political parties and industrial associations have argued
against FDI in retailing due to following reasons:
(1) 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.
(2) The examples of south east Asian countries show that after allowing FDI, the
domestic retailers were marginalised and this led to unemployment.
(3) 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.
(4) 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.
(5) 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.
(6) 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.

FDI in Retailing in India - Policy and Entry Routes

In India, till recently, FDI was not allowed in retailing, but the Union cabinet on
January 24, 2006 rationalised and simplified the FDI policy and allowed the contentious
issue of foreign investment in retail sector by allowing FDI up to 51 percent with prior
government approval for retail trade in single brand products. This would imply that foreign
companies would be allowed to sell goods sold internationally under a single brand, viz.
Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products are
produced by same manufacturer would not be allowed. However, there are indications that
the Government may allow foreign investments in retail segments where small domestic
players do not operate. The Department of Industrial Policy and Promotion is preparing a
detailed policy for further liberalisation of FDI in the country, which is likely to be
announced before the budget 2007-08. As part of the proposed move, the Ministry has
marked out sports goods, electronics and building equipment as some of the sectors that
may be opened up with a 51% cap on FDI. The government is also considering to permit
multibrand retail in such areas. The government is likely to discuss the matter with the left
parties before taking a final call on the issue. The Left has initially stalled the government’s
plans to allow FDI in multi-brand retail on the grounds that it will adversely affect mom-and-
pop stores.

It is worth mentioning that FDI restrictions have not deterred prominent international
players from entering India. Many U.S and other international retailers and consumer goods
companies consider India a top-priority market with the potential for breakthrough growth.
In this context (a) Wal-Mart CEO, John Menzar visited India in 2005 and met with Prime
Minister to discuss relevant issues. Wal-Mart’s sourcing from India, which was U.S.$300
million in 2004 reached to U.S.$1.2 billion in 2005.(b) Fashion brand DKNY is set to foray
into Indian fashion industry through franchise agreement with Indian company, S. Kumar’s.
(c) Tommy Hilfiger, International fashion icon says that “We are going to build a wonderful
lifestyle business here” (d) Phillip Morris is ready to unveil its plans for kraft in India
through Kraft Jacob Suchard (KJS) India, a wholly owned arm of Philip Morris India (e)
Starbucks has expressed its interest in entering India through the franchise route.
Although before January 24, 2006 FDI was not allowed in retailing, many
international players are operating in the country.
Some of entry routes employed by them are discussed in details as below:
(a) Manufacturing and Local Sourcing: Companies that set up manufacturing
facilities are allowed to sell the products in the domestic market. Consumer durable
companies such as Sony and Samsung have entered the retail sector through this route. Due
to high labour cost in their domestic market, many international brands are setting up
manufacturing bases in developing countries such as India and China and / or are sourcing
products from local manufacturers. For example, Levi's and Tommy Hilfiger are sourcing
products from Indian manufacturers like Arvind Mills. Benetton has a manufacturing unit in
India. Other international brands like GIVO from Italy have set up export-oriented
manufacturing facilities. These companies are allowed to sell products to Indian consumers
through franchising, local distributors, existing Indian retailers, own outlets, etc.
(b) Franchising: Franchising is the most preferred mode through which foreign players
have entered the Indian market. It is the easiest route to enter the Indian market.
Franchising is often used as a mode to expand the market of a particular retail enterprise
outside domestic economy since it allows firms to expand without investing their own
capital, is based on local expertise and enables firms to curb local oppositions and
regulations. This is the most common mode for entry of fast food chains across the world.
Apart from fast food chains like Pizza Hut, players such as Lacoste, Mango, Nike and Marks
and Spencer, have entered the Indian market through this route.
For setting up franchising operation, the foreign players are required to take
permission from the Reserve Bank of India (RBI). RBI often imposes the condition that
franchisers have to bring in foreign investment and set up a base for carrying on operational
activities. A foreign franchiser not wishing to make a direct investment would have to
render technical assistance to the franchisee. Some franchisee, such as Pizza Hut has made
significant investment in the supply chain. The arrangements between franchisee and
franchiser are found to be extremely flexible and are based on negotiation between the
two. Some Indian franchisees have complained about high franchising fees together with
high real estate costs, high import duties and other costs escalate the prices. For instance,
the cost of a Marks and Spencer product is higher than not only the brands produced
domestically but also in comparison to the price of the product in the UK. The high prices
restrict the ability of the foreign players to penetrate the market but they have entered the
country to make their brands visible to the huge Indian market.
If FDI is allowed in retailing, franchisees are not very sure whether they would hold
the retailing rights for the brands. According to industry representatives, since franchisees
largely constitute of domestic traders (even some unorganised retailers have take up
franchising rights) who have made significant investment in infrastructure, government
through legislation must ensure that they do not loose out their franchising rights if FDI is
allowed in retailing and the franchisers decide to change the mode of operation. The
existing franchisees have also expressed an interest in entering into joint venture with the
franchisers if FDI is allowed in retailing.
(c) Test Marketing: Test marketing is another route through which many foreign
players have entered the Indian market. Foreign investment Promotion Board (FIPB) allows
foreign companies for test marketing of their products for a two-year period by the end of
which they are required to set up manufacturing facilities in India. Direct selling companies
like Amway and Oriflame entered the Indian market through this route. Initially, Amway got
an approval for test marketing for a period of two years but they managed to secure an
extension of one more year. At the end of the third year, they set up contract
manufacturing facilities and brought in foreign investment and technical know-how.
Oriflame too extendedits test marketing license for a third year and at the end of which had
set up a manufacturing facility in Noida (UP) for producing certain specific products. Other
products are imported and would continue to be imported from abroad.
Nokia came to India through the test marketing route in mid-1990s. Initially they got
a license for two years to test their products in the Mumbai circle. After three months of
their entry they tied up with the service providers to provide integrated services to their
customers. Due to pressure from the FIPB, Nokia had tied up with the HCL Infotech as a
strategic partner for all India distribution of Nokia products. After the success of its products
in the country, Nokia had opened up an office but had not set up a manufacturing facility
and continued to import all products (even models made specifically for India). After
another two years they divided the country into four zones and entered into a strategic
alliance for distribution with Supreme for East and West India while HCL continued with
North and Southern zone. Nokia had also applied for the cash and carry license from the
FIPB and has recently got the license. Nokia is aggressively targeting the Indian consumers
and plan to capture 75 percent of the mobile market in the next seven years. The company,
which currently operates as a wholesale cash-and carry, recently announced that it would
set up manufacturing facilities very soon. The test marketing route allows foreign players to
test the demand for their products in Indian market before undertaking investment. Even if
FDI is allowed in retailing, many foreign players would like to enter the Indian market
through this route.
(d) Wholesale Cash-and-Carry Operation: This is the route through which large
international retailers such as Germany's Metro Cash & Carry GmbH and Shoprite Checkers
of South Africa have entered the Indian market. The wholesale cash-and-carry operation is
defined as any trading outlets where goods are sold at the wholesale rate for retailers and
businesses to buy. The transactions are only for business purposes and not for personal
consumption as in the case of retailing.
(e) Distributor: Companies such as Swarovski and Hugo Boss have set up distribution
offices in India and these offices supply the products to local retailers. All products of Hugo
Boss are imported and distributed through the company's distributor.
(f) Special Cases: The Sri Lankan retailers have entered the India market through the
initiatives of Export Development Board of Sri Lanka (EDB) which obtained special
permission from the RBI to set up retail operations in India. The EDB has leased 17 retail
outlets in Spencer Plaza in Chennai in which Sri Lankan retailers are showcasing and selling
their products. The Sri Lankan products showcased in these stores are mostly at the higher
end of the quality spectrum and can be brought into the country free of duty. This gives an
advantage to large Sri Lankan retailers like Hameedia not only to establish a global presence
but also to access the large customer base of India at competitive prices. The EDB is also
exploring the possibilities of setting up similar trade centres in other cities like Delhi and
Mumbai. Although this mode has allowed retailers from Sri Lanka to enter the Indian market
without domestic manufacturing and sourcing conditions and some products sold by these
traders are similar to those sold by Indian retailers, EDB did not face any opposition from
Chambers, retailers and the trading houses. Although the official policy is that FDI in
retailing is allowed only in one brand and that too up to 51% in retailing, but it has not acted
as an entry barrier. Foreign players have a substantial presence in the country and have
used several alternative unique routes to enter Indian Trading Sector. Some of the existing
foreign players are listed below in table 4.
Table 4: Some Existing Foreign Players and Prospective Entrants
 Retailers Type Status
7-Eleven Super Market Evaluating
Amway Direct Selling Already in
Auchan Hypermarket Evaluating
Carrefour Multi format retailer Wait and Watch

Dairy Farm Multi format retailer Tied up with RPG

JC Penny Product sourcing Already in

Landmark Department Store Already in

Lee Cooper Product sourcing Already in
Levi's Product sourcing Already in
Mango Apparel retailer Already in
Marks & Spencer Department Store Already in
Metro Cash & carry Already in
Oriflame Direct selling Already in
Reebok Oint venture Already in

Shoprite Wholesale cash-and-carry Already in

and
franchising

Sony Manufacturer Retailer Already in

Wal-Mart Hypermarket Agreement with Bharti

Source: FDI in Retail Sector, Department of consumer affairs, Government of India, p. 115.

Conclusion
It is evident that ever growing urban and rural markets in India represent an
unprecedented and vast unexplored opportunity for retailing to all types of formats. Initially
there may be certain reservations and apprehensions in allowing global players in India’s
retailing but if they are allowed in a phased manner on the basis of a well conceived and
chalked out policy, they are likely to lead to more investment in organized retailing and
allied sectors. As already discussed, it would also lead to inflow of latest technical know
how, establishment of well integrated and sophisticated supply chains, availability of
standard, latest and quality products, help in up gradation of human skills and increased
sourcing from India. Yet the following points may be kept into consideration in this context:

1. Since the Indian retail sector is highly fragmented and domestic retailers are in the
process of consolidating their position, the opening up of FDI regime should be in
phased manner over 5 to 10 years time frame so as to give the domestic retailers
enough time to adjust changes.
2. FDI should not be allowed for multi brand stores in near future, as Indian retailers
will not be able to face competition with these stores immediately.
3. At present it is also not desirable to increase FDI ceiling to more than 51% even for
single premium brand stores. It will help us to ensure check and control on business
operations of global retailers and to protect the interests of domestic players.
However, the limit of equity participation can be increased in due course of time as
we did in telecom, banking and insurance sectors.
4. Foreign players should not be allowed to trade in certain sensitive products like arms
and ammunition, military equipment, etc. and the list of excluded products should be
clearly stated in the FDI policy.
5. Certain zoning restrictions may be imposed by the state government / local bodies
for town planning. Generally super markets and hyper markets should not be
allowed in the mid of city so as to protect the existence of unorganised or
comparatively medium sized retail organizations.

The strategy of opening up should be backed by appropriate reform measures. India

can learn from the experiences of other developed and developing countries and develop its
own strategies, laws and regulations that would be in the best interest of the country. As of
now, there is no proper definition of retailing or retail formats in India. International players
are exploiting the situation and are often entering the market and expanding their
businesses through multiple routes and are operating in the country with more than one
format of retailing. The regulatory regime should address these issues. The entry norms
should clearly state the approval requirements, conditions / restrictions if any imposed, etc.
The government should also strictly enforce the quality standards for local production and
imports.
References
1. FDI in Retail Sector in India, Department of Consumer Affairs, Ministry of
Consumer Affairs, Public and Food Department, Government of India.
2. U.S. Department of Labour, Bureau of Labour Statistics. http//stats.bls.gov/iag/whole
retailtrade.htm
3. http://www.brc.org.uk/latesdata.asp
4. Bajpai and Das Gupta (2004) 'Multinational companies and FDI in China and India'
CGSO Working paper no. 2, January. The Earth Institute of Columbia University.
5. Palmade, V. and Andrea Anayiotas (2004) "Foreign Direct Investments Trends :
Looking Beyond the current gloom in Developing Countries". Public Policy Journal,
September 2004. Note number 273. The World Bank Group Website :
http://rru.worldbank.org/documents.pdf
6. Swapna Pradhan: Retailing Management, The McGraw-Hill Companies(2007)
7. Chetan Bajaj, Rajnish Tuli & Nidhi Srivastav: Retail Management, Oxford University
Press (2006)
8. Suja Nair: Retail Management, Himalaya Publishing House (2006)
11
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Govt. issues guidelines for wholesale trading

Posted On: 03-04-2010 00:00:00 10
 The government has spelt out the rules for FDI-funded
wholesale or cash and carry trading ventures in order to
clearly distinguish between wholesale and retail activity and
prevent circumvention of the law on this matter. Under India’s
FDI policy, 100 % FDI is permitted in wholesale trading and 51
% in single brand retail, while foreign investment is not allowed in multi-brand
retail. As a result several multinationals like Walmart, Metro and Tesco, have
set up cash and carry stores in India. According to new comprehensive
guidelines, whether a transaction is wholesale or retail would depend on the
type of customers to whom the sale is made and not the size and volume of
sales. Wholesale trading would mean sale of goods to retailers, industrial,
commercial, other professional business users or to other wholesalers, but not
for personal consumption. Excepting for sales to the government, wholesale
trading could be done with business entities holding VAT registration, sales tax,
and service tax and trade licenses. It would also include B2B e-commerce.
Wholesale trading of goods would also be permitted among companies of the
same group. However, such wholesale trading to group companies taken
together should not exceed 25 % of the total turnover of the wholesale
venture and the wholesale made to the group companies should be for their
internal use only. The rules have been incorporated in the consolidated FDI
Policy document.

RETAILERS LOOK AFRESH AT WHOLESALE BIZ.

Retailers are taking a relook at cash and carry(wholesale trading) ventures in the
hope of tapping millions of kiranas(independent stores). The potential tie-ups with overseas
firms-which are allowed to invest freely in the cash and carry business –are an additional
temptation, say retailers and consultants tracking the sector.

Indiabulls’ retail arm,Store One Retail, recently announced its foray into the cash and
carry segment. Global investor TPG, which has put in a bid for debt hit Vishal Retail, plans to
convert the latter intoa cash and carry venture. Aditya Birla Group is also said to be ready
with the back end and infrastructure required for the wholesaling business.
 According to reports, even beleaguered Subhiksha Trading Services has entered
Segment in its attempt to rejuvenate itself, tying up with kiranas as a supplier.

Cash-and-carry was not the businees of choice for retailers in the slowdown era.
Retailers such as the Future group, Reliance retail, Dhoot-family led Videocon and
Wadhawan group’s Spinach had deferred their cash and carry plans to conserve cash.

“In view of tremendous growth prospectus in the wholesale trading business in the
country and in order to take the benefit of this growing industry , your company intends to
expand its business activity of wholesale trading ,”Store One Retail told its shareholders
recently. Its executives did not respond to calls on the subject.

While FDI in retail is barred, international retailers can own 100 per cent cash and
carry ventures. “Since FDI is allowed in this sector, some of them are positioning themselves
to attract foreign itie-ups later ,” said a Mumbai based retail consultant who did not want to
be named.

He also said Vishal, Subhiksha and Store One are looking at this route to salvage their
retail ventures.

Though cash and carry forms a miniscule portion of India’s Rs-92,000-crore

organised retail sector, the vast trading opportunity with the 12 million kiranas has attracted
both domestic and foreign retailers, such as Metro, Walmart, Tesco and Carrefour. It is a
growing realisation that one needs to cater to the kirana to thrive in this country. Everybody
thought that kiranas will vanish once modern retail comes but it has not happened, says
Purnendu Kumar of retail consultancy Technopark Advisors.

For those such as Aditya birla Retail, it is the large back end facilities such as
warehouses, distribution centres and supply chains they own and operate which is giving
them confidence to look at the cash and carry venture. “We are ready with the necessary
infrastructure . Infact , we have more than 6,00,000 square feet of back-end be used for a
cash and carry venture,”said Thomas Varghese, chief executive of Aditya Birla Retail.

Wholesale Challenges

While retailers are enthusiastic about cash and carry, retai consultants enumerate
the number of challenges retailershave to overcome in running the business.

Since the margins are lower, you need to have right merchandise, tight supply chain
and super-efficient systems in wholesale trading. While running a large hyper market is
easy, cash and carry is difficult to manage, as it has a large food component,” says Kumar.

While gross margins in food and grocery retailing are 14-15%, margins in the cash
and carry business are about 8-9%. “ Cash and carry can never become a large part of
Indian retail due to scale issues. It makes sense for kiranas to buy directly from FMCG firms,’
says Anand Raghuraman, partner and director of Boston Consultancy Group.

A Mumbai based retail consultant said international cash and carry players like
Germany’s Metro AG are also trading very cautiously due to mounting real estate costs,
supply chain issues amid tight Agriculture Produce Market Committee(APMC) laws.

While Metro opened its first store in India way back in 2003, it could open only 5
cash and carry outlets-in Bangalore, Hyderabad, Kolkata and Mumbai- in the past seven
years.In 2006, Metro said it planned to set up distribution centres in 35 cities that have a
population more than a million.

After signing with Bharti in 2007, Walmart opened its first cash and carry store under
the name Best Price Modern Wholesale in May 2009. The company plans to roll out 15 cash
and carry outlets.

After almost seven years of talks with Indian companies, Carrefour, the World’s
second largest retailer, last year said it planned to start its cash and carry business in 2010
and is talking to Indian partners for a joint venture.

“Business to business needs are very different from that of business to customer. It is
very complicated; one has to offer differential pricing and leverage supply chains to
succeed,” said Hemant Kalbag of AT Kearney, an international business consultant.