2012

FORE School of
Management

[Analysisof FDI in
Multi-Brand Retail in
India]

SUBMITTED BY: SUBMITTED TO:

VAIBHAV MANOCHA PROF. RAKHI TRIPATHI
Roll no: 53051
Course: PGDM 2011-13 IMG V
 Declaration

I, VAIBHAV MANOCHA certify that this report is my own work, based on my personal study and/or
research and that I have acknowledged all material and sources used in its preparation, whether
they be books, articles, reports, lecture notes and any other kind of document, electronic or
personal communication. I also certify that this report has not previously been submitted for
assessment in any other unit, except where specific permission has been granted from all unit
coordinators involved, or at any other time in this unit, and that I have not copied in part or whole or
otherwise plagiarized the work of other students and/or persons.

Date: 22/11/2012 Vaibhav Manocha

Place: New Delhi Roll No. 53051

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 Certificate

This is to certify that Mr. VAIBHAV MANOCHA, Roll No. 53051 has completed his Dissertation of 2
Credits and has submitted this project report entitled Analysis of FDI in Multi-Brand Retail in
India ,towards part fulfilment of the requirements for the award of the Post Graduate Diploma in
Management (IMG-V) 2010-2012.

This Report is the result of his/her own work and to the best of my knowledge no part of it has
earlier comprised any other report, monograph, dissertation or book. This project was carried out
under my overall supervision.

Date: 22/11/2012

Place: New Delhi

Prof. Rakhi Tripathy

(Internal Faculty Guide)

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 Acknowledgement
At the very beginning, I would like to thank Prof. Rakhi tripathy, Faculty, FORE School of
Management, Delhi for her continuous support and guidance without which this research could not
have been completed. Her help and advice has been critical for the completion of this project.

My sincere thanks to all respondents who participated in my research and helped me towards
completion of it.

VAIBHAV MANOCHA

FORE School Of Management

New Delhi

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Contents
Executive Summary ................................................................................................................................. 7
Introduction............................................................................................................................................. 8
INDIAN RETAIL SECTOR ....................................................................................................................... 8
POLICY INITIATIVES (INDIAN GOVT.) ................................................................................................. 10
THE BIG PLAYERS............................................................................................................................... 11
Literature review ................................................................................................................................... 13
Research objectives ............................................................................................................................... 16
Data and research methodology .......................................................................................................... 17
Findings and analysis ............................................................................................................................ 18
FDI IN MULTI-BRAND RETAIL: IS IT NEED OF THE HOUR? ................................................................. 18
ARGUMENTS IN FAVOR OF FDI IN RETAILING................................................................................... 19
ARGUMENTS AGAINST FDI IN RETAILING ......................................................................................... 20
A COMPARISON OF INDIA vis-a-vis OTHER DEVELOPING COUNTRIES ............................................. 22
CHALLENGES FACING FDI .................................................................................................................. 25
THE CHANGING INDIAN CONSUMER ................................................................................................ 26
DATA ANALYSIS ................................................................................................................................. 27
Conclusion ............................................................................................................................................. 30
Limitations ............................................................................................................................................ 32
References ............................................................................................................................................. 33
Annexure ............................................................................................................................................... 34

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LIST OF FIGURES

FIG 1: Indian Retail Market Size

FIG 2: Global Market Share by Big Players

FIG 3: Awareness level

FIG 4: Impact on Small Local Retailers

FIG 5: Changes that may arise

FIG 6: Frequency of Purchase

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Executive Summary
The purpose of the research is to analyse present and future scenarios of India when
allowance in Multi-Brand Retail FDI is made. The share of organized retailing in India, at
around 2%, is too low, compared to 80% in the USA, 40% in Thailand, or 20% in China, thus
leaving the huge market potential largely unexploited. Once the multi-brand retail sector is
opened up, multinational retail giants with turnovers of tens of billions of dollars will be
lining up for a share in the Indian market. Some of the prominent big players keen to enter
into India include Wal-Mart, Carrefour, Tesco, Metro etc. 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. Also
entry of large low-cost retailers and adoption of integrated supply chain management by them
is likely to lower down the prices. Where these are some of the favourable arguments,
concerns over various small and fragmented family-owned business and local dealers is
considered anti-favourable. So is the controlling nature of these Retail Giants.

When compared to other developing countries like China, where Multi-Brands have recently
established their operations; there are striking similarities in terms of Pricing as a key for
consumer base, Fragmented Markets and High Population density with a large proportion of
middle class. But there exists some differences as China enjoys a huge trade surplus with US
and other major trading partners. Also Chinas manufacturing base is very strong.

The changing Consumer base due to high growth in disposable incomes, majority of
population lying in the bracket below 25 years and rapid urbanization has led India in being a
lucrative destination for foreign retailers. In a survey conducted to analyse the perception of
Indian consumers towards retailers awareness and its possible impacts on local dealers. In
the end it is concluded that advantages of FDI in Multi-Brand Retail Sector has positive
implications more than it may affect local retailers.

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Introduction

FDI
Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment
to acquire a lasting management interest (10% or more) in an enterprise operating in an
economy other than that of the investor. Foreign direct investment is the sum of equity
capital, reinvestment of earnings and other long or short term capital as shown in the balance
of payments. It usually involves participation in management, joint venture, transfer of
technology and expertise. There are two types of FDI: (a) Inward foreign direct investment
and (b) Outward foreign direct investment. Foreign direct investment excludes investment
through purchase of shares. Foreign direct investment can be used as one measure of growing
economic globalization.

Multi Brand Retailing

It is marketing of two or more similar and competing products, by the same firm under
different and unrelated brands. While these brands eat into each others' sales (see
cannibalism), multi-brand strategy does have some advantages as a means of (1) obtaining
greater shelf space and leaving little for competitors' products, (2) Saturating a market by
filling all price and quality gaps, (3) Catering to brand-switchers users who like to
experiment with different brands. Opening up FDI in multi-brand retail will mean that global
retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of
household items and grocery directly to consumers in the same way as the ubiquitous
kirana store.

INDIAN RETAIL SECTOR

India is a land of retail democracy- hundreds of thousands of weekly haats and bazaars
are located across the length and breadth of our country by peoples own self-organizational
capacities and interests. Our streets are bazaars lively, vibrant, and safe and source of
livelihood for millions. India has the shop density of 11 outlets per 1000 people and number
around 15 million, giving India the highest retail outlet density in the world. But only four per
cent of them have larger than 500 square feet area. Food constitutes 70 per cent of retail
sector, which means it has a direct link with the rural economy. Our retail democracy is
characterized by:

1. High levels of livelihood in retail with nearly 40 million employed which accounts for 8%
of the employment and 4% of the entire population.

2. High levels of self - organization.

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3. Low capital input

4. High levels of decentralization.

The Indian retail market, variously estimated at $400-450 billion, is dominated by the highly
decentralized unorganized sector. The small retail outlets, most of them family-owned
businesses, account for about 95 per cent of the sales. The creaky, old distribution system that
India has lived with is grossly inefficient. The Indian farmer typically gets only a third of
what the final consumer pays, instead of the two-thirds that his counterparts do in countries
that have organized retailing. India is the second largest producer of fruits and vegetables in
the world, but almost 30 per cent of these go waste for want of storage and processing
facilities. It is generally agreed that the bulk of the Indian economy would gain, significantly,
from the emergence of a well-capitalized retail industry. The organized retail industry is one
of the sunrise sectors with huge growth potential. Total retail market in India which stood at
USD 400 billion in 2009-10, is estimated to attain USD 573 billion by 2012-13. Organized
retail industry accounts for only 5% of total retail industry but is expected to reach 10% by
2013.

900
849
800

700

600

500

400 425 Market Size (in USD bn)

300 321
238
200 201

100

0
1998 2002 2006 2010 2014*

Fig1: Indian Retail Market Size

Present Scenario of Indian Retailing Industry

The share of organized retailing in India, at around 2%, is too low, compared to 80% in the
USA, 40% in Thailand, or 20% in China, thus leaving the huge market potential largely
unexploited. Mounting earning levels, education and an international revelation have
contributed to the progression of the Indian middle class purchasing and shopping practices
are burgeoning as an outcome. Retailing all the way through non-traditional channels such as

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Fuel Stations, Direct Selling and Home Shopping Television is on the rise. Contemporary
organized retail is short and uneven with cast list not being able to harvest economies of
scale. However, retailing through formats such as supermarkets, hypermarkets, department
stores and other forte chains are escalating. Top business houses in the country are investing
in the sector. This includes Food World, Shoppers Stop, Crossroads, Globas, Pyramid and
other such outlets. FDI in retail trading is not encouraged in any form. However, a few
overseas retail names appear in the marketplace in the nature of franchisee. Quite a lot of
companies including Metro, Carrefour and Ahold are exploring way in options. Benetton,
Lifestyle and Zegna are already in the Industry in India. India has a hefty middle class of 350
million and sophisticated personnel to lever diverse significant functions like merchandising,
sales promotion, inventory management, purchasing and marketing. Despite the global
economic recession and a consequent slowdown in the Indian economy, organized retail
continued to make headway although at a slower pace in 2009. Nonetheless, if the current
retail landscape is compared with that of 2004, it has undeniably become a much larger
environment. Retail stalwarts such as Wal-Mart, Tesco and Marks & Spencer have already
made inroads into the Indian retail industry and with multi-billion dollar investments by
major domestic players such as Reliance Retail; the market is expected to go from strength to
strength. India also possesses IT skills in the area of supply chain management, database
management and inventory management. A number of drivers are aiding the development of
the Industry such as improved levels of income and increasing purchasing power, entry of
foreign retailers and reforms in real estate markets.

POLICY INITIATIVES (INDIAN GOVT.)

Retailing is the largest private sector industry in the world economy with the global industry
size exceeding $6.6 trillion and a latest survey has projected India as the top destination for
retail investors. And the further upsurge is anticipated in the retail sector as the Government
of India has firstly opened up 51% FDI in single brand retail outlets and 100% in cash and
carry business. In Nov, 2011, the Cabinet cleared the bill to raise foreign direct investment
to 51% in multi-brand retail and 100% in single brand. This decision was later given a
green signal on 18th September 2012 when Government of India finally allowed 51% FDI
in multi brand retail along with slew of other reforms. The decision was cheered by global
retail giants such as Wal-Mart that have long been eyeing India's rewarding retail sector
which is mainly occupied by small 'mom & pop' shops. Currently, organized retail, or large
chains, makes up less than 10% of the market. An ASSOCHAM report states that India's
overall retail sector is expected to rise to USD 833 billion by 2013 and to USD 1.3 trillion by
2018, at a compounded annual growth rate of 10% driven by the emergence of shopping
centres and malls, and a middle class of close to 300 million people that is growing at nearly
2% a year.

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THE BIG PLAYERS
Once the multi-brand retail sector is opened up, multinational retail giants with turnovers of
tens of billions of dollars will be lining up for a share in the Indian market. Some of the
prominent big players keen to enter into India include Walmart from US (sales last year of
over $400 billion (bn) from 9,000 stores), Carrefour from France (sales $130 bn from 9,500
stores), Tesco from UK (sales $100 bn from 5,400 stores), and Metro from Germany (sales
$96 bn from 2,100 stores).

The predatory practices adopted by several multinational retail chains are well documented.
Given their financial strength, big multinational players have the capacity to invest and
sustain losses for years in order to wipe out competition. In the process, however, a large
number of small and local retailers could be wiped out. The big multinational retailers will
not be content with setting up a few stores in India. Rather they will collectively set up
thousands of shops all over the country over a period of time. Their business model demands
that they build large volumes, which they would use to buy at lower prices, and this will help
them to build larger volumes (leading to more concentration) till it becomes very difficult for
small and local retailers to compete with them.

WAL-MART
Wal-Mart has emerged as one of the largest corporations in the world, and definitely the
largest player in retail. It started only fifteen years ago. In May 2009, Wal-Mart was ready to
open its first store in India. The reason for Wal-Marts entry in India was clear The Indian
middle class. The worlds biggest retailer had been silently working on its strategy for India
for around two years. Mom-and-pop stores and traditional distribution networks dominated
the $375 billion Indian retail market. Wal-Marts first outlet was set to launch in the city of
Amritsar, Punjab in North India. The first store built over 50,000 sq. ft. was established on
the outskirts of the city, Amritsar. The store employed 200 locals and was likely create 500
indirect jobs. In the first few weeks itself, the company had managed to sign on close to
35,000 members.

In November 2006, Wal-Mart formed a joint venture with Bharti enterprises- Bharti
Walmart to open up its first wholesale, Business to Business, cash-and-carry and back-end
supply chain management operations in India. And now Wal-Mart plans to open retail outlets
in India in the next 12 to 18 months (by 2014), making it the first multinational to jump on
the government's decision to open the country's huge retail market to foreign players.

CARREFOUR
French retail major Carrefour, the second-largest in the world in terms of revenue ( 90
billion) after Wal-Mart, is the second retailer to put a stronghold in India. Ever since
Carrefour launched its first store in India, a cash-and-carry wholesale format store at
Seelampur, East Delhi on 30th December 2010, the retailer has maintained an awkward
silence on its expansion plan for the country. Interestingly, Carrefours only cash-and-carry
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store in Asia at present is in India. The group has a total of 151 cash-and-carry stores - 137 in
France, 13 in Europe (excluding France) and 1 in Asia.

After the announcement of Indias opening up of foreign investment in retail, Wal-Mart

Stores can be the first to tap the $505 billion market as Carrefour and Tesco focus on battling
falling profits and consumer spending. Global retailers may need to invest at least $500
million over three to five years in the worlds second-most populous nation to expand retail
operations across the country and such investment could pose a challenge for the European
retailers, which are struggling amid the European regions debt crisis.

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Literature review
This publication indicates that foreign direct investment assists in increasing the income that
is generated through revenues realized through taxation. It also plays a crucial role in the
context of rise in the productivity of the host countries. In case of countries that make foreign
direct investment in other countries this process has positive impact as well. In case of these
countries, their companies get an opportunity to explore newer markets and thereby generate
more income and profits. There is a need to re-look, clarify, and further liberalize the policy
on single-brand retailing to promote investments by global chains in India. This in turn would
not only boost retail growth in India but would also help realize Indias retail revolution
dream.

Doing Business in India, a publication of the World Bank and the International Finance
Corporation [2009]

The publication analysis the present and future scenarios of retail giants and indicates that
giant corporations like Wal-Mart and Reliance have started to try and take over the Indian
retail sector. The entry of the giant corporate retail in Indias food market will have direct
impact on Indias 650 million farmers and 40 million people employed in tiny retail. More
than 6600 mega Stores are planned with Rs. 40,000 crores by 2011. Wal-Mart is the biggest
player in retail. In a report Oligopoly Inc. 2005, the ETC Group has shown that
consolidation, cut throat competition and aggressive global expansion are the driving forces
in the food retail sector. In 2004, the top 10 global food retailers accounted for combined
sales of $840 Billion, 24% of the estimated $3.5 trillion global market. This was up from $
513.7 billion in 2001. If Wal-Mart and other retail chains get a foothold in India; it will mean
displacement of small retailers and farmers.

A Report by Navdanya/ Research Foundation for Science, Technology and Ecology titled -
CORPORATE HIJACK OF RETAIL - Retail Dictatorship vs Retail Democracy [2006]

This Economic report analyses the negative impact Multi-brand retails can have on Indian
economy and makets. 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. 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.
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

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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. 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.

Foreign Direct Investment in Retailing in India Its Emergence & Prospects, The Earth
Institute of Columbia University [2010]

This article published states that it is worth debating whether it is really necessary to put
conditions such as mandatory rural employment creation and mandatory investment in back-
end infrastructure, etc while permitting FDI. One needs to be mindful that the conditions do
not become a burden, making investment commercially unattractive to start with, in which
case the potential benefits of permitting FDI in retail will not be realized in the absence of
scale of investments. Also, one really needs to debate whether there is a need to distinguish
between foreign financial institutions and foreign retailers for permitting FDI. There have
been cases where private equity investors brought not only capital, but also the right talent
and know-how relevant to the sector to make a business successful. In fact, today, some
Indian organized retailers may be more in need of funds from private equity players than a
strategic tie-up with a foreign retailer.

Foreign direct investment in multi-brand retail: Time to expand the horizons published on
Saturday, Jul 31, 2010.

It is imperative that policy making with respect to FDI in multi-brand retail must take into
account the unique situation of India, and not blindly follow Western practices. No other
country (except China) faces the challenge of meeting the needs of 1.2 billion people. No
other country has close to 400 million people below the poverty level, to be given some basic
livelihood. No other country has the social complexity coupled with a fractious polity, which
can erupt into social unrest with ease, when inherent balance is disturbed. In such a scenario,
policymakers must serve the needs of the broadest base of the population, not just those at the
top of the economic pyramid.

Palmade, Vincent and Anayiotas, Andrea - in FDI Trends - Looking Beyond the Current Gloom
in Developing Countries

Retailing is the interface between the producer and the individual consumer buying for
personal consumption. As such, retailing is the last link that connects the individual consumer

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with the manufacturing and distribution chain. This paper tries to establish the need of the
retail community to invite FDI in multi brand retailing. In between the advocators and
antagonists of FDI inflows in Indian retailing, there are few issues to be addressed for the
consumers rights to be saved, for the employment opportunities to be generated, for the
regularization of the different retailers working in different areas, etc. In spite of so many
reasons behind allowing and not allowing FDI from entering our Indian borders, there are
few examples of other developing countries who initially protested against the entry of
foreign investment in retail sector and then, later on proved out to be the most effective
decision in countrys development and standing in the world. The final decision is yet to be
taken by the Indian Government for the same.

FDI in multi-brand retail: is it the need of the hour?? International Journal of

Multidisciplinary Research Vol.2 Issue 6, June 2012, ISSN 2231 5780

Corporate retailing in India is witnessing considerable growth. The share of corporate retail in
overall retail sales is projected to jump from around 3% currently to around 9-10% in the next
three years. A number of large domestic business groups have entered the retail trade sector
and are expanding their operations aggressively. Several formats of corporate retailing like
hypermarkets, supermarkets and discount stores are being set up by big business groups
besides the ongoing proliferation of shopping malls in the metros and other large cities. This
will have serious implications for the livelihood of millions of small and unorganized
retailers across the country. Large organized retail is controlled across the world by many
governments. An appropriate regulatory framework for the organized retail sector in India
has to be framed keeping in mind the Indian specificities. India has the highest shop density
in the world with 11 shops per 1000 person. If the corporate retail starts spreading in India
without any control and if the Government brings in Foreign Direct Investment in the sector,
the potential social costs of the growth and consolidation of organized retail, in terms of
displacement of unorganized retailers and loss of livelihoods will be enormous. Regulation
needs to be more stringent and restrictive.

FDI in India's Multi Brand Retail Boon or Bane: Universal Journal of Management and
Social Sciences Vol. 2, No.1; January 2012

This article stressed upon the fact that Governments decision to open up foreign direct
investment (FDI) in multi-brand retail and relax rules for single-brand stores is heartening.
Allowing foreign retailers management control in multi-brand retail would ensure a well-
capitalized industry and induce foreign retailers to invest in back-end operations and
infrastructure. However, merely opening up of multi-brand retail will not suffice and other
state-level reforms are needed.

Feast of Reforms Ahead published in Economic Times dated 17th September.

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Research objectives
To study the need of opening up of FDI in multi-brand retail.
To analyze the positive and negative impacts of the reforms to be undertaken.
To assess the market situations for the same changes in other countries (Developing
Economies).
To review the challenges to be faced by FDIs while investing in India.
To evaluate the change in the customers perception after introduction of FDI in retail

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Data and research methodology
The descriptive research methodology has been used to collect the data. To evaluate the
overall position of the entry of FDI in multi brand retail in India, secondary data has been
collected from various published sources, newspapers and websites. Interpretation of the data
is more on qualitative terms than on quantitative terms.

Secondary Research: Analysis of Governments policy making in Multi-brand Retail

investments and its impact has been undertaken through this research. Also situational
analysis of other two stake holders in this decision making i.e. Multi-Brand Retailing giants
and small Indian Retailers has been done through secondary research. The data was collected
from various articles published in newspaper, World Bank Annual reports and previously
published research papers.

Primary Research: Responses from a sample size of 153 were collected from Delhi-NCR
region to evaluate the changing consumer perception towards retailing, organized and un-
organized segments and the upcoming foreign players. Please refer Annexure C for the
questionnaire.

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Findings and analysis

FDI IN MULTI-BRAND RETAIL: IS IT NEED OF THE HOUR?

For the 4th time in five years [2005-2009], India has been ranked as the most attractive nation
for retail investment among 30 emerging markets by the US-based global management
consulting firm. According to a market research report published in June 20093 by RNCOS
titled, 'Booming Retail Sector in India', organized retail market in India is expected to reach
US$ 80 billion by 2013. The opening up of FDI directly impacts the following components of
Indian economy:

Indian farmers: The biggest beneficiary of FDI in retail would be farmers who will be able
to improve their productivity. The farmers will not only be able to increase their output but
will also get better rewards in terms of supplying to organized retailers by tying up long term
contracts with them. The foreign retailers will purchase raw materials from the farmers and
various other goods from the original producer directly. The farmers across Indias 6, 00,000
villages stand to gain with higher profits and better market access. The farmers would be
getting good prices for their harvest. The original producers will get a higher price since the
profit will flow to them directly, leaving behind the middle men. This can happen as the giant
retailers have capital and high buying power. Direct purchase from farms will hugely benefit
small farmers who are not getting good returns by selling in the local mandi. The payments
will be directly credited into bank accounts and will be free from commission agents. The
large retailers will also save 10-15% in comissions by purchasing fruits and vegetables
directly.

Indian consumers: India is now the home of the largest number of moneyed consumers.
Indian consumers will get access to quality goods at a low cost, that too at home. The stage is
now set when Indian consumers will have the luxury of world class opportunity of shopping
to meet the requirements of daily life. They will find a new world of enjoyment of picking up
consumer items to their greatest satisfaction. Big retailers will often allow discounts on
selected items which will facilitate the consumers and they can end up with marginal
bargains.

Proper tax system: Tax revenue will increase like VAT and service tax. The organized sales
with computerized billing system will also yield more revenue through commodity taxes like
VAT and service tax to the government. Thus tax buoyancy of the economy would increase.

Partnership opportunity: Indian retailers have reason to be happy with foreign direct
investment in the retail sector because it is a partnership opportunity that involves a lot of
learning that could take them to higher profitability. The central government is planning to
have 51% foreign investment; this means the foreign retailers need partners for the rest
investment to gain market.

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 High availability of jobs: There will be huge job opportunities in the country (in crores) as
there will be opening of malls and store houses. The entry of modern retailers will expand the
market creating large amount of additional jobs in retail. The job opportunities will vary from
ordinary workers to specialized officers. The employment opportunities will be in retail sales,
retail floor manager, cold chains, warehousing and logistics.

Distribution system: The report shows that 30-35% of Indias total production of fruits and
vegetables is wasted every year due to inadequate cold storage and transport facilities.
Almost half of this wastage can be prevented if fruit and vegetable retailers have access to
specialized cold storage facilities and refrigerated trucks. The organized retail will bring in
efficient practices that will help farmers in the procurement process, reduce wastage with
finally efficient storage and will finally cut the losses. The giant retailers will help India to
have strong storage system with highly developed transportation. Giant retailers with decades
of experience on how to manage mountains of inventories supply them to key distribution
centers and do it all faster, better and cheaper.

ARGUMENTS IN FAVOR 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 organized retailers.

(7) FDI would lead to development of different retail formats and modernization of the
sector.

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 (8) FDI would lead to expansion of opposite sell formats as good as modernization of a
sector.

(9) Industry trends for retail sector indicate that organized retailing has major impact in
controlling inflation because large organized retailers are able to buy directly from producers
at most competitive prices. World Bank attributes the opening of the retail sector to FDI to be
beneficial for India in terms of price and availability of products as it would give a boost to
food products, textiles and garments, leather products, etc., to benefit from large-scale
procurement by international chains; in turn, creating jobs opportunities at various levels.

(10) As foreign investors exploring their potentials in the retail sector are keen on developing
malls in India, the size of organized retailing is expected to touch $30 billion by 2010 or
approximately 10 per cent of the total. This has initiated market-entry announcement from
some retailers and has signaled to international retailers about Indias seriousness in
promoting the sector.

(11) India is already a key sourcing country for some global retailers. The entry of foreign
retailers is likely to further promote Indias manufacturing and export sectors, leading to a
double bonus for the economy.

(12) Allowing FDI in multi-brand retail can give a big push to the countrys social agenda,
too, and has the potential to even positively impact and promote tourism, computerisation,
systemisation, governments ability to influence trade when required, address issues such as
inflation (since data available becomes more reliable/ accurate and trade gets increasingly
organized), reduction of black economy, control over food hygiene, better food quality
assurance and accountability, increased direct and indirect employment, push to real estate
and availability of better managerial talent, etc.

(13) Also, the retail revolution can change countrys perception across the globe, integrating
it seamlessly into world trade and economy.

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 marginalized 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.

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(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) The opening up of the retail sector would affect the sales in the unorganized sector. As a
result the employment it provides would be affected. Also, by reducing the number of
intermediaries, organized retailing will lead to some job displacement.

(7) It is said that FDI would provide employment opportunities. But, the fact is that they
cannot provide employment opportunities to semi-illiterate people. Though they can provide
employment opportunities like drivers, watchman etc. but this argument gets more attention
because in India semi-illiterate people in quiet large in number.

(8) 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.

(9) 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.

(10) The organizational form of rural producers as they interact with Big Retail is still not
being done. Small farmers can undertake contract farming, but they have no bargaining
power and will be at the mercy of their buyers. Small producers need to be organized into
farmer companies or producer cooperatives that can deal with Big Retail from a much
stronger position.

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A COMPARISON OF INDIA vis-a-vis OTHER DEVELOPING COUNTRIES
Over the past two decades, developing countries other than India have successfully allowed
FDI in modern retail allowing the big players to establish themselves and get acclimatized
according to developing economic conditions. Therefore, it is essential to learn lessons from
developments in foreign economies. Although, it is imperative that policy making with
respect to FDI in multi-brand retail must take into account the unique situation of India, and
not blindly follow Western practices. This is because no other country (except China) faces
the challenge of meeting the needs of 1.2 billion people. No other country has close to 400
million people below the poverty level, to be given some basic livelihood. No other country
has the social complexity coupled with a regional and complex political scenario, which can
erupt into social unrest with ease, when inherent balance is disturbed.

If we look at the grocery business across the world, for instance, market shares range from 20
percent to as high as 80 percent. In Figure 2 given below, the market share of top retailers in
several developed and developing countries is given. What is alarming to note is that market
share in Brazil (38 percent) and Thailand (32 percent) has been achieved in just over a
decade. This in comparison to India has a similar situation where only 5% of the market share
is under organized retail sector and multi-brand retail share is almost negligible.

FIG 2: Global Market Share by Big Players

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Experience of FDI in Retail Trade in China
49% foreign ownership was permitted in six provinces and Special Economic Zones in
1992. Restrictions were lifted progressively and in 2004 were lifted completely.

Retail sales have been increasing at a healthy pace of over 16%. The size of China market
was estimated at over a trillion dollars in 2010 with share of modern retail being around 25%

Between 1996 and 2001 number of traditional outlets in China went up from 1.9 million to
2.5 million. Employment in the retail and wholesale sector went up from 28 million to 54
million in the same period.

Most of the international players have entered China and are having a reasonable level of
success.

Experience of FDI in Retail Trade in Thailand

Wet market and small family owned grocery stores dominated the scene. Modern retail
boomed in early 90s.

Allowed 100% FDI only in 1997 with capital requirement of TBH 100 million and TBH 20
million for each additional outlet and TBH 100 million for each wholesale.

Local players were marginalised by the entry of foreign players.

Entry of foreign players in a recessionary economy adversely impacted manufacturers,

wholesalers and retailers in the short run.

Entry of foreign players has encouraged growth of agro-food processing industry and
enhanced the exports of Thai made goods through networks of the foreign retailers.

Experience of FDI in Retail Trade in Russia

First retail chain only in 1994 but FDI allowed only in 2000.

Healthy growth rate of 23% from 2000 to 2008(USD 558 billion) dropped to USD 470
billion in 2009 and recovered to USD 543 billion in 2010.

Metro entered Russia in 2001 followed by Auchan in 2002. Both remain in the Top 10
although all others are Russian. Carrefour entered and exited the Russian Market in 2009.
Wal-Mart is yet to enter the market.

Share of modern retail is over 40% in Russia.

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Experience of FDI in Retail Trade in Chile
Supermarket sector was launched in 1990s with domestic capital.

Late in the 90s, Carrefour and Ahold entered the market and within 3 years increased their
market share to around 9%.

They, however, had to withdraw completely from the market in 2006.

The Top Two domestic chains control 65% of the Chile retail market.

SIMILARITIES b/w INDIA AND CHINA (A special case)

1. PRICING
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 re-priced to RMB 69, the pieces sold jumped to 10,000.

2. FRAGMENTED MARKETS
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 no single but multiple cultures, resulting in a
never-before-kind of cultural stretch.

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 3. SIZE, POPULATION AND MIDDLE INCOME PEOPLE
"In terms of sheer size, India and China have huge potential in the retail sector. Like China,
India also has the population, which crosses 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 conscious consumers. So the foreign players must consider the above two factors
i.e. price and value of products they offer.

Other than these striking similarities, there are some key differences between the two
economies. Unlike India, China enjoys a huge trade surplus with US and other major trading
partners. Chinas manufacturing base is very strong. Because of its globally competitive
manufacturing sector, China can afford to open its retail sector to foreign investment. In
contrast, Indian economy is services-led, with services outpacing industry and agriculture.

CHALLENGES FACING FDI

1. RESOURCE CHALLENGE: India is known to have enormous amounts of resources.

There is manpower and significant availability of fixed and working capital. At the same
time, there are some underexploited or unexploited resources. The resources are well
available in the rural as well as the urban areas. The focus is to increase infrastructure 10
years down the line, for which the requirement will be an amount of about US$ 150 billion.
This is the first step to overcome challenges facing larger FDI.

2. EQUITY CHALLENGE: India is definitely developing in a much faster pace now than
before but in spite of that it can be identified that development has taken place unevenly. This
means that while the more urban areas have been tapped, the poorer sections are inadequately
exploited. To get the complete picture of growth, it is essential to make sure that the rural
section has more or less the same amount of development as the urbanized ones. Thus,
fostering social equality and at the same time, a balanced economic growth. Entry of foreign
retailers only aggravates the situation.

3. POLITICAL CHALLENGE: The support of the political structure has to be there

towards the investing countries abroad. This can be worked out when foreign investors put
forward their persuasion for increasing FDI capital in various sectors like banking, and
insurance. So, there has to be a common opinion between the Parliament and the Foreign

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countries investing in India. This would increase the reforms in the FDI area of the country.
The decision taken by UPA government to allow FDI has been heavily criticized by the
opposition parties as well as some of its own allies. The decision is still a matter of debate in
the parliament ever since the reforms decision has been finalized.

4. EXECUTION CHALLENGE: Very important among the major challenges facing larger
FDI, is the need to speed up the implementation of policies, rules, and regulations. The vital
part is to keep the accomplishment of policies in all the states of India at par. Thus, asking for
equal speed in policy implementation among the states in India is important.

5. India must also focus on areas of poverty reduction, trade liberalization, and banking and
insurance liberalization. Challenges facing larger FDI are not just restricted to the ones
mentioned above, because trade relations with foreign investors will always bring in new
challenges in investments.

THE CHANGING INDIAN CONSUMER

The following are the few factors which drive the big retailers for seeing India as a lucrative
market for its business:

Indians with an Ability to spend over USD 30,000 a year (PPP terms) on conspicuous
consumption represent 2.8% of the entire population. But with a population base of
1.07 billion people, this number amounts to 30 million people, a market next only to
USA, Japan and China.

ECONOMIC GROWTH: This has meant greater disposable incomes for the Indian
middle class, which currently comprises 22% of the total population. Disposable incomes
are expected to rise at an average of 8.5% p.a. till 2015.

DEMOGRAPHICS: More than 50% of the population is less than 25 years of age and
strong growth is expected to continue in this age bracket.

URBANIZATION: The Indian urban population is projected to increase from 28% to

40% of the total population by 2020 and incomes are simultaneously expected to grow in
these segment.

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DATA ANALYSIS

Awareness about Multi-Brand Retail Chains

FIG 3: Awareness level

Of all Multi-brands, Wal-Mart has the highest percentage of awareness followed by other
global giants- Carrefour, Tesco and Metro. 80% of the respondents know about the Wal-
Mart. This can be attributed to the fact that Wal-Mart has established its presence in Indian
market by Collaborating with Bharti. Although Tesco and Metro have not launched any kind
of operations in India, but their global presence has created awareness among Indian
Consumers.

Impact on Small Local Retailers

FIG 4: Impact on Small Local Retailers

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What Is a Balanced Scorecard?

By Dr. Craig B. Watters
A majority no. of consumers thinks that their consumption patterns will change, ultimately
impacting small retailers, once the foreign players start their operations in India. Their
negative perception towards the impact of Multi-Brand Retailers could be attributed to
opposition from various parties and false rumours about local dealers losing their jobs.

Changes that May Arise

FIG 5: Changes that may arise

As indicated by mean values of the above factors, Improved and tighter quality standards
and Wide range of products and services could be the most important changes that might
occur in Indian Retail Markets once the foreign retailers establish themselves. Single-point
shopping and significant reduction in prices are considered equally important. None of the
respondents think that there will be no change at all in the retail scenario.

Frequency of purchase

FIG 6: Frequency of Purchase

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As it is seen in Organized Retail segment, a majority of respondents visit the likes of Big
Bazaar, More etc. only once a month whereas; local kiryana shops are visited once or twice
every week. This shows that products which are frequently consumed are purchased from
local shops whereas people visit Grocery Retail Chains for products that have a longer
replacement duration.

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Conclusion
In spite of the different positive and negative experiences of the countries and its various
sections involved with the trade activities, we can say that when FDI is allowed in India then
it will be an advantage to India and not a disadvantage to India for the reasons below
justifying the same:

1. FDI WILL NOT AFFECT UNORGANIZED PLAYERS.

At present, mom-and-pop stores cater to 95% of the total market. They have unique
advantages, like home-grown processes, skills in retaining customers, nearness, 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.

2. 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 cost 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.

3. BENEFITS TO CONSUMERS

FDI will provide access to larger financial resources for venture in the retail sector and that
can lead to several of the other advantages. 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. They can lay down improved and
tighter quality standards and ensure that manufacturers adhere to them. The supermarkets
offer a wide range of products and services, so the consumer can enjoy single-point shopping.

4. REVISED ECONOMIC GROWTH

Organized retail is a lucrative proposition as it can bring supreme practices from around the
globe, leverage economies of scale and garner these benefits through retail operations in
India. India has a hefty middle class of 350 million and sophisticated personnel that
participate in diverse significant functions like merchandising, sales promotion, inventory
management, purchasing and marketing. Secondly, despite the global economic recession and
a consequent slowdown in the Indian economy, organized retail continued to make headway

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although at a slower pace till 2011. Also, if the current retail landscape is compared with that
of 2004, it has undeniably become a much larger environment.

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Limitations
The sample size of 153 is very small to make any concrete conclusions about the
perception Indian Consumers. It can only give some insight since the population
target is huge. It takes in account people only from Delhi-NCR region.

Recent events have not been entirely covered as Govt. allowed 51% FDI in Multi-
Brand Retail on 18th September12 and is still considering policy changes.

Due to importance of Indian context in the Multi-Brand Retailing, majority of

research papers studied and newspaper articles analysed are of Indian origin.

The research involves opinion of various authors and publications over the past
decade as majority of it deals with future speculations.

Only 5 developing countries are considered for comparative analysis, which may not
present a true scenario.

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References
Briefing Paper # 3 -2011, Madhyam Briefing Papers

Universal Journal of Management and Social Sciences Vol. 2, No.1; January 2012: Retail in
India- BOON or BANE

ASSOCHAM report12 Indian Retail sector

India Brand Equity Foundation, July2010, Ministry of Commerce

International Journal of Multidisciplinary Research Vol.2 Issue 6, June 2012, ISSN 2231
5780

Strive Magazine, Vol. 1. Issue 2

Financial Express issue dated 5th November11

Economic Times dated 19th September12

DNA paper published on July 31, 2010

www.Wikipedia.org

Doing business in India a report by World Bank- 2009

http://dipp.nic.in/manual/manual_0403.pdf, Manual on the FDI in India, (2003), The

Ministry of Commerce and Industry.

RNCOS (2005), Report on Indian Retail Sector-An Outlook (2005-2010)

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Annexure
Appendix A: Questionnaire
1) Have you heard about the following multi-brand retail chains? (you may select more
than one)

WALMART
CARREFOUR
TESCO
ALDI
METRO

2) Will establishment of foreign retailers (likes of Walmarts & Carrefours) reduce the
purchase of consumers from local stores?

YES
NO
MAY BE

3) Rank in order of significance, the following important factors, once foreign retailers
start their operations in India? [1- Most
significant 5 Least significant]

Improved and tighter quality Standards

Wide range of product and services
Single-point Shopping
Significant reduction in prices
No change at all!

4) What is your frequency of purchase from following retail formats?

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Organized Retail
Once a week Once in 15 Once a Once in 2
(Big Bazaar, Shoppers Stop etc.)
days month months
Unorganized Retail Once a week Once in 15 Once a Once in 2
(Small vendors, local markets etc.) days month months

5) On an average how much amount do you spend in a visit to these retail chains (In
case of only grocery shopping)?
< 500
500-1000
1000-2000
>2000

6) Rate the following factors in order of their preference while choosing the below
mentioned retail formats:
[1- Least Significant 5- Most Significant]

ORGANIZED RETAIL CHAINS

- Wide range of Choices available - - - - -

- Discount Schemes - - - - -
- Membership Cards - - - - -
- Product Quality - - - - -
- Customer friendly Staff - - - - -
- Shelf visibility of products - - - - -

UNORGANIZED RETAIL STORES

- Nearby location
- - - - -
- Availability at cheap prices
- - - - -
- Trustworthiness towards Shopkeeper
- - - - -
- Product Quality
- - - - -
- Credit options available
- - - - -
- Ease of Access
- - - - -

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