FDI in Retailing – Is it the need of the hour?


By
L. Dhamayanthi
S. Pradeep Kumar
First Year MBA
School of Management
Sri Krishna College of Engineering and Technology
Kuniamuthur PO, Coimbatore–8
 


Why not FDI in retailing?

We would like to start with the question "Why Foreign Direct Investment (FDI) in retailing should not be allowed in India?" FDI in retailing which is expected 4 years before, but still it isn't allowed in India .Our Prime Minister Dr.Manmohan, addressing business leaders in Kuala Lumpur in December 2005 prior to the East Asia Summit, admitted that there were problems in opening up the retail segment to FDI. However, he promised that the government "will come up with a positive outcome in five-six months". The countries like China, U.S, Philippines, Argentina etc. where FDI is allowed in retailing has produced wonderful results. A study observes that India's major trading partners such as the United States, Japan and the European Union have made "requests" to New Delhi to allow FDI in retailing, during the Doha Round negotiations of the WTO. India's retail sector accounts for 14 percent of GDP and is growing annually at 7 per cent. Still the talks are going on whether to allow FDI or not. Now foreign retailers are allowed through the licensing and franchise route. FIIs are allowed to invest in listed companies. But foreign retailers are not allowed directly. With FDI inflows set to rise to $5.3 billion this year, liberalizing the retail sector would make easier availability of products.

Reasons for not allowing FDI in retailing in India

1. Affects unorganized players (kirana shops):

The overall size of retail market in India at present is estimated at Rs 5,88,000 crore of which, unorganized market is worth Rs 5,83,000 crore and the share of organized market is calculated at Rs 5,000 crore. Moreover the unorganized market provides employment opportunities to 3.95 million people (next to agriculture). The critics argue that opening the retail sector would affect the sales in the unorganized sector. As a result the employment it provides would be affected. Others say that by reducing the number of intermediaries, organized retailing will lead to some job displacement.

2. Kind of employment:

It is said that FDI would provide employment opportunities, critics argue about the kind of employment it can provide. They say that it cannot provide employment opportunities to semi-illiterate people. They further say that, though it can provide employment opportunities like drivers, watchman etc. this argument gets more attention because in India semi-illiterate people in quiet large in number.

3. Lowering of prices:

Some fear that, if FDI is allowed in retailing then it would result in lowering of prices because FDI will result in good technology, supply chain, etc. If prices were lowered then it would lower the margin of unorganized players. As a result the unorganized market will be affected. This in turn will affect the employment opportunities provided by the unorganized market.

Though there are many reasons stand in the way of allowing FDI, the above said reasons receive more attention. Now let us see China's experience in retailing after allowing FDI in retailing sector.

FDI in retailing – China's experience

A decade ago, China was a different story — very little organized retail, virtually no malls and a not-too-significant middle-class, with the average Chinese not exposed to foreign brands. China allowed FDI in the year 1992 when FDI was allowed WTO played an important role today, China's retail industry is worth upwards of $580 billion with more than 14 global mega retailers setting up shop in the last ten years.

China allowed FDI in retailing with some restrictions,

1. It was restricted to six major cities namely (including Beijing, Shanghai and Guangzhou, Tianjin, Dalian, Qungdao) and Special Economic Zones.
2.
Foreign ownership initially restricted to 49% of joint ventures.
3. Foreign retailers that operate large retailers will be limited to 50 units

China now with "No restrictions"

China opened up its retail sector completely in December 2004. Under the new regulations, overseas entities are now allowed to set up a Foreign Invested Commercial Enterprise (FICE), which may act as a commission agent, wholesaler and retailer or engage in franchising activities on a wholly owned basis in China.

Effect of opening up of the sector:

1.
40 foreign retailers have secured approval since 1992
2.
$22 billion of FDI attracted, 3.6% of total FDI
3.
Employment in retailing has grown at 6% p.a. since 1992 to 53 million
4.
Retail sales have grown@13.5% CAGR since FDI was permitted (see annexure 2)
5.
In 2003, FDI in wholesale and retail was US$ 1.1 Billion
(Around 30% of our total FDI in 2003)
6. Some well-known foreign retail corporations include Nike, Wal-Mart, Carrefour, 7-Eleven, and Giordano. These retailers, amongst others, account for some of the 10 percent of total merchandise
7. Since 1992 FDI has improved the quality of experience, choice and prices for the Chinese shoppers.
8. There was also considerable increase in traditional stores, hypermarkets, super markets, convenience (see annexure1).

What made China to achieve this?

The above details show that China saw tremendous growth by opening the retail sectors to FDI. The factors that contributed to China's success in retailing are

1. First, it is huge. With a population in excess of 1.3 billion people, even a small share of middle class consumers is bound to be a lot of people

2. China has recently joined the WTO and is thus obligated to make changes to the   consumer distribution system that will benefit efficient retailers

3. A potentially vast domestic market; and an environment from which it is easy to export.

4
. Import duties will be reduced substantially. For example, the tariff on imported automobiles will drop from the current 80-100% down to 25% by 2007.

5. As the population was huge, the foreign retailers also have enough manpower to employ.

Presence of WAL-MART

The world's largest retailer Wal-Mart's presence has made China stronger. The following details proves that,

* Entered Chinese market in 1996.
* Has 43 stores in 19 cities as on date
* Had sales of US$ 704 Million in 2003.
* Has employed more than 20,000 people.
* Has paid taxes of US$ 111 Million in total.

Thus, for the china's success in retailing has come through FDI. And it is consist of lot of factors as seen above.

India's current position in retailing

In India the size of the retail market is at Rs 5,88,000 crore of which, unorganized market is worth Rs 5,83,000 crore and the share of organized market is calculated at Rs 5,000 crore. Retailing is the largest employer after agriculture (8% of population). India has the highest outlet density I the world around 12million outlets. Around 96 percent of the shops are less than 500 sq. ft.

The players include

Hypermarket
* Big Bazaar
* Giants
* Shop rite
* Star

Department store
* Lifestyle
* Pantaloons
* Piramyds
* Shoppers Stop
* Trent

Entertainment
* Fame Adlabs
* Fun Republic
* Inox
* PVR

Foreign players include:

The foreign players who came through the route of franchising are Guess, Esprit, Chanel, Clarks, Mango, Aigner, Bvlgari, Hugo Boss, Mark & Spencers and Tommy Hilfiger.

Retailing in India – If FDI is allowed

Experts say that when FDI is permitted in India then it would it would result in increased employment, GDP growth, and infrastructure development and it would also improve the market and develop competition. They view that India has the lowest per capita retail space availability and as economy grows and consumerism rises, there will be more and more need for retail space.

Similarities exist between India and China

Pricing is key

Differences between urban and rural consumers are significant in both China and India. Most foreign entrants wrongly assume that anything Western will sell. The initial fascination for Western brands goes off once the discerning consumer finds local products of the same quality at affordable prices. Getting the price right is essential. Initial trials, despite high prices are a common phenomenon. However, the average consumer is extremely value conscious and seldom accepts dollar-denominated prices, which are often the benchmarks set by global entrants.

For instance, a well-known Scandinavian furniture retailer in China priced a table at RMB 299 and ended up selling a mere 300 pieces a month. But when the product was repriced to RMB 69, the pieces sold jumped to 10,000.

Markets within a market

India, with its distinctive regions, diverse religions, languages and cultures, is as diverse as many sub-markets within a market like China. Retail formats that have worked in South India have not received the same response in the other regions. It has been no different in China. In China, the consumer market is growing fastest in cities with population ranging from half to three million. Companies that focus on the large, high profile coastal cities seem to be missing out, just as those in India that are focusing on the principal urban centers. Foreign retailers entering India and China are faced with not single but multiple cultures, resulting in a never-before-kind of cultural stretch.

Size, population and middle income people:

"In terms of sheer size, India and China have huge potential in the retail sector," says N V Sivakumar, executive director of PricewaterhouseCoopers (PwC), India. Like China, India also has the population, which crosses Rs.100 crores and more important is that most of the people belong to middle income group. So as far as they are concerned they are highly price and value concisions consumers. So the foreign players must consider the above two factors i.e. price and value of products they offer.

India's advantage over China:

The advantage that India possess when compared to China are as follows:     

Indian market least saturated:

This is one of biggest advantage that India possesses over China. AT Kearney's recently released second Global Retail Development Index (GRDI), India has moved up one rank to No. 5 in terms of attractiveness to global players. China's rank has dropped from one to three. India has gained because there are no global players in India but in China there are already 14 players. So in China the scope for further development is less when compared to India. As India has no foreign players it makes market least saturated and provides enough opportunities for further development.

Existence of counterfeits:

Though Indian market also contains a good number of counterfeits it is not at par with China. Chinese market leads in the production and availability of counterfeits. As the counterfeits are more in China when compared to China it makes Indian market safer. Comparatively this makes Indian market more trustable. This would act as an added advantage to India. 

"FDI WILL BE AN ADVANTAGE AND NOT A DISADVANTAGE":

When FDI is allowed in India then it will be an advantage to India and not a disadvantage to India.

FDI will not affect unorganized players:

At present, mom-and-pop stores cater to 97% of the total market. They have unique advantages, like indigenous processes, skills in retaining customers, proximity, convenience and services. However, global retailers investing in new markets have not hampered local retailers. The kirana shops in large parts of the country will enjoy built-in protection from supermarkets because the latter can only exist in large cities. The Kirana shops can get goods from the large outlets (which are present in large towns and cities only) and sell it to their customers so that their profit margin would increase.

For instance, FDI in telecom did hit urban STD booth operators, but most of them have now been converted to kiosks selling mobile connections and SIM cards.

Lowering of prices – not a disadvantage:

Lowering of prices will not be a disadvantage, because if foreign players are present in India it makes the availability of goods at cheaper prices. This arises because the foreign players will have good technology, supply chain etc. that makes the product price cheaper. So this can be availed by the Kirana shops (i.e. buying the goods from the large retailers and selling it to their customers). Moreover, as the price decreases the purchasing power of the people will also increase. So the issue of lowering prices will not be a disadvantage, it will always be an advantage.

FDI's benefit from the view if the customers:

(i) FDI will provide access to larger financial resources for investment in the retail sector and that can lead to several of the other advantages that follow

(ii) ii) The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers

(iii) They can lay down better and tighter quality standards and ensure that manufacturers adhere to them.

(iv) The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping   

FDI – at last:

Finally the government of India has said that FDI would be allowed in India. Thanks to the impact of WTO, which played an important role.  The government has said that "51 percent FDI would be allowed" and also under the system of "Single brand retailing".

What is single brand retailing?

When the government announced about single brand retailing there is a lot confusion regarding that. Finally the Department of Industrial Policy and Promotion (DIPP) have come out with the notification. These stipulations would prevent third party sourcing and encourage multinationals to set up a manufacturing base in India.          

Further, the notification makes it clear that FDI would be allowed only with a prior three-tier approval of the Government. The applications for approval will have to specifically indicate the product/product categories that are proposed to be sold under the single brand, with additional products or product categories requiring fresh approval.

Conditions under single brand retailing:

They are as follows,

1. Products to be sold should be of a `single brand'.
2. Products should be sold under the same brand internationally.
3. 'Single brand' product retailing would cover only products, which are branded during manufacturing.

Examples were of Sony and Nokia

Recommendations for India

The recommendations for India are,

* Permit FDI in phases (first allow for 49 percent, after some years 74 percent, based on the results 100 percent).
* Invest in supply chain infrastructure
* Grant industry status to retail business
* Ensure flexibility of labor laws.

Conclusion

FDI in retailing would surely an advantage to India and it would also help India in becoming 'developed country'. As the people also accept the retailing it will be an advantage to them also. So the government should also open the retail sector to the foreign investment, as it also serves as an employment generator.

So, 'FDI in retailing is the need of the hour'
 


L. Dhamayanthi
S. Pradeep Kumar
First Year MBA
School of Management
Sri Krishna College of Engineering and Technology
Kuniamuthur PO, Coimbatore–8
 

Source : E-mail April 12, 2006

 

     

 

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