A

BRIEF REPORT

ON

RETAIL SECTOR IN INDIA

August 2012















A brief report on Retail sector in India

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1. RETAIL SECTOR IN INDIA

1.1 Overview
Retailing in India is one of the business enterprises of its economy and accounts for 14 to
15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the
top five retail markets in the world. India is one of the fastest growing retail markets in the
world. India's retailing industry is essentially owner manned small shops account for more
than 90%. In 2010, larger format convenience stores and supermarkets accounted for about
4% of the industry, and these were present only in large urban centres.

Until 2011, Indian central government denied Foreign Direct Investment (FDI) in multi-
brand retail, forbidding foreign groups from any ownership in supermarkets, convenience
stores or any retail outlets. Even single-brand retail was limited to 51% ownership and a
bureaucratic process.

In November 2011, India's central government announced retail reforms for both multi-
brand stores and single-brand stores. These market reforms paved the way for retail
innovation and competition with multi-brand retailers such as Wal-Mart, Carrefour and
Tesco, as well single brand majors such as IKEA, Nike, and Apple. The statement flickers
intense activism, both in opposition and in support of the reforms. In December 2011,
under pressure from the opposition, Indian government placed the retail reforms on hold till
it reaches a consensus. In January 2012, India approved reforms for single-brand stores
welcoming anyone in the world to innovate in Indian retail market with 100% ownership,
but imposed the requirement that the single brand retailer source 30% of its goods from
India. Indian government continues the hold on retail reforms for multi-brand 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. Hence, organized retail which now constitutes a small four per cent of total
retail sector is growing at a much faster pace of 45-50% per annum and quadruples its
share in total retail trade to 16% by 2011-12.
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 unorganized retail
sector is growing at about 10% per annum with sales rising from US$ 309 billion in
2006-07 to US$ 496 billion in 2011-12


1.2 Growth India Retail - Total vs. Organized
2003-04 2004-05 2005-06 2006-07 CAGR
2004-07 (%)
Indian Retail (Rs. Billion)
Food & grocery 7,028 7,064 7,418 8,680 7.3
Beverages 212 309 373 518 34.7
Clothing & footwear 777 993 1,036 1,356 20.4
Furniture, furnishing, appliances and
services
512 656 746 986 24.4
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Non-instutional healthcare 950 972 1,022 1,159 6.9

Sports goods, entertainment, equipment
& books
212 272 308 395 23.0
Personal care 371 433 465 617 18.5
Jewellery, watches, etc. 530 610 655 863 17.7
Total Retail 10,591 11,308 12,033 14,574 11.2
Organized Retail (Rs. Billion)
Food & grocery 39 44 50 61 16.5
Beverages 11 12 13 16 14.7
Clothing & footwear 168 189 212 251 14.3
Furniture, furnishing, appliances and
services
67 75 85 101 14.8
Non-instutional healthcare 14 16 19 24 20.0
Sports goods, entertainment, equipment
& books
25 33 44 63 37.0
Personal care 11 15 22 33 46.9
Jewellery, watches, etc. 18 24 33 49 40.5
Total Organized retail 350 408 479 598 19.5
Share of Organized Retail in Total
Retail (%)
3.3 3.6 4.0 4.1

1.3 Major Indian Retailers
Brands Stores
REI Agro Ltd Retail 6TEN and 6TEN kirana stores
Future Groups-Formats Big Bazaar, Food Bazaar, Pantaloons, Central, Fashion
Station, Brand Factory, Depot, aLL, E-Zone etc.
Fabindia Textiles, Home furnishings, handloom apparel, jewellery
RP-Sanjiv Goenka Group Retail-Formats Spencers Hyper, Spencer's Daily, Music World, Au Bon
Pain (International bakery cafeteria), Beverly Hills Polo
Club
The Tata Group-Formats Westside, Star India Bazaar, Steeljunction, Landmark,
Titan Industries with World of Titans showrooms,
Tanishq outlets, Croma.
Reliance Retail-Formats Reliance MART, Reliance SUPER, Reliance FRESH,
Reliance Footprint, Reliance Living, Reliance Digital,
Reliance Jewellery, Reliance Trends, Reliance Autozone,
iStore
K Raheja Corp Group-Formats Shoppers Stop, Crossword, Hyper City, Inorbit Mall
Lifestyle International-Lifestyle, Home Centre, Max, Fun City
and International Franchise brand stores.
Aditya Birla Group More Outlets
Gitanjali Nakshatra, Gili, Asmi, D'damas, Gitanjali Jewels,
Giantti, Gitanjali Gifts, etc
Nmart Retails with 131 operating Stores till now and total 287 Stores in India and 1 to open in DUBAI
Shortly and many more in Process Globally (ZAMBIA, BANGLADESH, SRI LANKA etc.). (Expected
to be 500 by the end of 2012)

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2. GOVERNMENT POLICIES

2.1 Background
India has liberalized its single brand retail industry to permit 100% foreign investment, with
regulatory issues and legal structures pertinent to establish operations in this new dynamic
market. Indias 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:

1995 World Trade Organizations general agreement on trade in services, which include
both wholesale and retailing services, came into effect
1997 FDI in cash and carry (wholesale) with 100% rights allowed under the government
approval route
2006 FDI in cash and carry (wholesale) brought under the automatic route
Up-to 51% investment in a single- brand retail outlet permitted
2011 100% FDI in single brand retail permitted

The Indian government removed the 51% cap on FDI into single-brand retail outlets in
December 2011, and opened the market fully to foreign investors by permitting 100% 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% foreign
equity participation. The existence 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.

a) FDI in single-brand retail - While the specific 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% FDI is permissible in
single-brand retail, subject to the Foreign Investment Promotion Board (FIPB) sanctions and
conditions mentioned that are:

Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if
produced by the same manufacturer)
Products are sold under the same brand internationally
Single-brand products include only those identified during manufacturing
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.

b) FDI in multi-brand retail - 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
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one roof. Currently, this sector is limited to a maximum of 49% foreign equity participation. On
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, recommended opening the retail sector for FDI with a
51% cap on FDI, minimum investment of US$100 million and a mandatory 50% capital
reinvestment into backend operations. Notably, the paper does not put forward any upper limit
on FDI in multi-brand retail

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%
cap on FDI in multi-brand retail is acceptable. Meanwhile the Department of Consumer Affairs
has supported the case for a 49% cap and the Small and Medium Enterprises Ministry has said
the government should limit FDI in multi-brand retail to 18%.

c) 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 standardize 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% 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 is made to ensure that the retailing
giants do not resort to predatory pricing or acquire monopolistic tendencies.

2.2 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
Job creation
No threat to kiranas (mom-and-pop stores)



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Several constituencies are positively impacted by modern trade
Farmers/producers Consumers Government Unorganised
trade
Inefficiencies in Indias
food supply chain
Modern trade improves
the quality
of life
Increased tax inflows for the
government
Kiranas as a
major
part of Indias
retail
sector
Several layers of
intermediaries
Greater choice Organised and unorganised
trade that is different in
structure, size and in terms of
taxes paid to the exchequer
Indias large
retail sector that
accommodates
both organised
and unorganised
trade
High wastage levels (24-
40%)
More competitive
prices
The challenge of revenue
collection from the
unorganised retail sector

Lower than fair market
value paid to farmers
Better quality of food
products for modern
trade players to transfer
best practices to
local farmers
Tax-compliant
modern trade
players who are
large taxpayers

High final prices for
consumers
Lifestyle parity where
Indian
products are similar to
those
available overseas

Agents controlling prices

Farmers benefit from
modern trade.
Consumers benefit from
modern trade
The government benefits
from modern trade.
Unorganised
trade
benefit from
modern
trade.
Wastage is reduced In a democracy,
fundamental
tenet of progressive policy
changes is that the main
beneficiary must be the
consumer.
State VAT revenues increase
as modern trade grows and
develops.
Kiranas can
source food
and non-food
items, essential
for operations,
from cash-and
carry providers,
benefitting from
bulk discounts.
Income flow for farmers
is stabilised.
As economies evolve,
governments should
provide for inclusive
growth
and minimal displacement.
Modern trade helps develop
related sectors (supply chain,
logistics, cold chain, etc.).
Companies in these sectors
contribute to the exchequer
in terms of indirect taxes.
Kiranas can
become franchise
partners for
modern trade
players
neighbourhood
format.
The quality of fruits,
produce, dairy, poultry,
etc. is improved.

Farmers are integrated
into
modern trade


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3. MAJOR GLOBAL PLAYERS

3.1 Wal-Mart
Wal-Mart Stores, Inc., branded as Walmart since 2008 and Wal*Mart before then, is an American
multinational retailer corporation that runs chains of large discount department stores and
warehouse stores. The company is the world's third largest public corporation, according to the
Fortune Global 500 list in 2012. It is also the biggest private employer in the world with over
two million employees, and is the largest retailer in the world. Wal-Mart remains a family-owned
business, as the company is controlled by the Walton family who own a 48% stake in Wal-Mart.
Wal-Marts investments outside North America have had mixed results: its operations in the
United Kingdom, South America and China are highly successful, whereas ventures in Germany
and South Korea were unsuccessful.

Sensing huge opportunities, Wal-Mart entered the Korea but adopted different strategies. Wal-
Mart attempted to penetrate the Korean market by building stores in distant areas where land
prices were low, replicating the US strategy of smaller-city store build-up. It had only 16 stores in
all of Korea with just one in the Seoul metropolitan area and could not achieve economies of
scale. The company expected the Korean consumers to drive to its stores for price shopping as
American consumers do. However, this location strategy did not match well with the Korean
consumers lifestyle and shopping habits. They prefer to buy smaller units on a more frequent
basis and to have accessibility to a store within walking distance. As a result, Wal-Mart faced
serious challenges in implementing its core competence in South Korea. Moreover, it could not
enjoy its buyer power in the local vendor market and had no control over its Korean supply
chain and procurement. Eventually, it packed its bags in 2006.

3.1.1 Wal-Mart in India

Bharti Wal-Mart Private Limited is a joint venture between Bharti Enterprises, one of India's
leading business groups with interests in telecom, agri-business, insurance and retail, and Wal-
Mart, the worlds leading retailer, renowned for its efficiency and expertise in logistics, supply
chain management and sourcing. The joint venture is establishing wholesale cash-and-carry
stores and back-end supply chain management operations in line with Government of India
guidelines. Under the agreement, Bharti and Wal-Mart hold 50:50 stakes in Bharti Wal-Mart
Private Limited. The first Wholesale Cash-and-carry facility named "Best Price Modern
Wholesale" Opened in Amritsar in May 2009 and subsequently in Zirakpur (Near Chandigarh),
Jalandhar, Kota, Bhopal, Ludhiana, Raipur, Indore, Vijaywada, Meerut, Agra, Lucknow, Jammu,
Guntur, Aurangabad , Bathinda and Amravati.
Bharti Wal-Mart strive to improve the quality of life for employees, customers and communities
through various interventions and the Direct Farm Program is one of them

Benefit to farmers:
7-10% higher price to farmers than what they get from Mandi
3-4% incentive for the quality of the produce farmers deliver to Bharti Wal-Mart based on
customer requirement
Expert advice on better crop planning and management
Efficient crop calendar management aimed at catching early and late seasons for better prices
Opportunity to maximize and improve income by offering better quality

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Benefit to stores & customers:

Fresh produce
Local source
Consistent quality
Safer food
Value for money
Lower cost compared to open market buys

3.2 Carrefour
It is an international hypermarket chain headquartered in Boulogne Billancourt, France, in
Greater Paris. It is one of the largest hypermarket chains in the world (with 1,395 hypermarkets
at the end of 2009, the second largest retail group in the world in terms of revenue and third
largest in profit after Wal-Mart and Tesco). Carrefour operates mainly in Europe, Argentina,
Brazil, China, Colombia, Dominican Republic, United Arab Emirates and Saudi Arabia, but also
has shops in North Africa and other parts of Asia, with most stores being of smaller size than
hypermarket or even supermarket. Carrefour means "crossroads" in French. Previously the
company head office was in Levallois-Perret, also in Greater Paris.

3.2.1 Carrefour in India

The Carrefour Group announces the opening of its first cash & carry store in India in New
Delhi under the name "Carrefour Wholesale Cash & Carry. With a sales area of 5200 m2, this
store located east of New Delhi in the Shahadra neighbourhood will offer more than 10.000
SKUs in food and non-food to professional businesses, institutions, restaurants and local
retailers. This opening is in line with the group's strategy to be present in major emerging
markets that offer significant expansion and medium- and long-term growth opportunities.

Carrefour Group Head Office Address:
16th Flr Building 9 A Cyber City DLF Phase 3
Gurgaon: 122001
Haryana, India

3.3 Tesco
It is a British multinational grocery and general merchandise retailer headquartered in Cheshunt,
United Kingdom. It is the third-largest retailer in the world measured by revenues (after Wal-
Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart). It has stores in
14 countries across Asia, Europe and North America and is the grocery market leader in the UK
(where it has a market share of around 30%), Malaysia, the Republic of Ireland and Thailand.

3.3.1 Tesco in India

Tesco has had a limited presence in India with a service centre in Bangalore, and outsourcing. In
2008 Tesco announced their intention to invest an initial 60m ($115m) to open a wholesale
cash-and-carry business based in Mumbai with the assistance of the Tata Group.

The global service operations of Tesco HSC are involved in creating and executing strategic
initiatives for Tesco retail stores worldwide. These strategic initiatives cover the IT, Business,
Financial, Commercial and Property aspects, among others, of Tesco operations. The operations
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cover all internal and external platforms that drive Tesco's business, making it one of the world's
most preferred retail stores. Tesco is the first major international retailer to have a fully-owned
support centre in India. We are dedicated to make the Tesco experience better for over 60
million customers worldwide, simpler for over 500,000 employees and achieve cost-efficiencies.

3.4 IKEA
IKEA is a privately held, international home products company that designs and sells ready-to-
assemble furniture such as beds, chairs, desks, appliances and home accessories. The company is
the world's largest furniture retailer. Founded in Sweden in 1943 by 17-year-old Ingvar Kamprad,
The first IKA store was opened in lmhult, Smland in 1953, while the first stores outside
Sweden were opened in Norway (1963) and Denmark (1969). The stores spread to other parts of
Europe in the 1970s, with the first store outside Scandinavia opening in Switzerland (1973),
followed by Germany (1974). Things were going so well for the company, that in 1973, the
company's German executives accidentally opened a store in Konstanz when they had meant to
open one in Koblenz. Later that decade, stores opened in other parts of the world, including
Japan (1974), Australia and Hong Kong (1975), Canada (1976) and Singapore (1978). IKEA
further expanded in the 1980s, opening stores in France & Spain (1981), Belgium (1984), the
United States (1985), the United Kingdom (1987) and Italy (1989) among other areas. The
company expanded into more countries in the 1990s and 2000s. Germany, with 44 stores, is
IKEA's biggest market, followed by the United States, with 37. At the end of 2009 financial year,
the IKEA group had 267 stores in 25 countries.

Swedish furniture home accessories IKEA is planning to enter India with a Euros 1.5 billion
(around Rs 10,500 crores) investment in a single-brand retail venture. In the first phase it plans
to set up 25 stores with an investment of Euros 600 million (around Rs 4,200 crores) in opening
25 stores. The company has already sought government permission to set up a 100% Indian
venture and has also promised to increase its sourcing from the country. In these stores
companies are permitted to stock goods from one brand only. The entry also comes with the
stipulation that at least 30% of the products have to be sourced from Indian micro, small and
medium enterprises - a major area of concern for IKEA until recently.