RGNUL-IPAN Working Paper Series 2012

Call for Submissions
(With Attached Concept Note) FDI IN MULTI-BRAND RETAIL IN INDIA

International Policy Analysis Network, Asia‘s first youth-led public policy think tank has initiated an Annual Working Paper Series in association with School of Agriculture Law and Economics (SALE), Rajiv Gandhi National University of Law, India from the year 2012. The Research Theme for 2012 edition of this series is “FDI in Multi-Brand Retail in India”. Students, academicians and Ph.D scholars are invited to submit papers to this Working Paper Series. Papers should address some specific social, political, economic or cultural aspect of this policy. Foreign contributors are especially encouraged to submit their contributions which discuss their own country‘s experience in Organised Retail Sector. Even though the issue is essentially a policy action by Govt. of India, the objective of this project is to stimulate and promote inter-disciplinary, multi-jurisdictional and comparative public policy analysis. This series for 2012-2013 will culminate with an international seminar or a book release by April, 2013. Next edition of the series with a new call for submissions will be issued in late October, 2013. Contributions selected by a peer review panel will be notified about their prospective presentation/publication by April, 2013. The RGNUL-IPAN Working Paper Series is intended to:
  

Present high quality research and writing (including research in-progress) to a wide audience of academics, policy-makers and commercial/media organizations. Set the agenda in the broad field of public policy and sustainable development. Stimulate and inform debate and policy, especially amongst youth.

Series Editor:

Ms. Brindpreet Kaur Coordinator, School of Agriculture Law and Economics (SALE) Rajiv Gandhi National University of Law, Punjab, India

Series Asst. Editor: Mr. Kshitij Bansal President, International Policy Analysis Network (IPAN) Research Assistants: 1. 2. 3. 4. 5. Ms. Sonali Dhanker, IPAN Research Coordinator Mr. Angshuman Hazarika, IPAN Research Coordinator Mr. Nikhil Suresh Pareek, RGNUL Student of Law Ms. Aparajita Paul, RGNUL Student of Law Mr. Ankush Thakur, RGNUL Student of Law

The Editorial Board is comprised of RGNUL academics and IPAN experts with a wide range of interests in public policy and economic research. They come from a variety of disciplinary perspectives including economics, geography, law, politics, sociology, cultural, gender and development studies. Submission Guidelines Contributors are encouraged to submit papers that address any specific social, political, economic or cultural aspect of this retail policy, including its forms, institutions, audiences and experiences, and its global, national, regional and local development. Specific and micro case studies are specifically encouraged. Contributors are highly encouraged to go through the detailed Concept Note attached with this call. They should bear in mind when they are preparing their paper that it will be available online for public reading. The deadline for submissions is January 31, 2013. Papers should conform to the following format:
     

3000-5000 words (excluding bibliography, including footnotes). 150-200 word abstract. Headings and sub-headings are encouraged. Chicago Manual of Citation should be strictly adhered to. Papers should be prepared as a PC compatible Microsoft Word (2003 or 2007) file. Graphs, pictures and tables should be included as appropriate in the same file as the paper.

The paper should be sent by email to: (With the subject line as “SUBMISSION_RETAIL POLICY WORKING PAPER”) Mr. Kshitij Bansal, Series Asst. Editor Sale.rgnul@gmail.com For regular updates on this series and other IPAN initiatives: www.facebook.com/IPANglobal

Concept Note

IPAN Working Paper No.01/2012

RGNUL-IPAN WORKING PAPER 2012
ON

FOREIGN DIRECT INVESTMENT IN MULTI BRAND RETAIL IN INDIA

NOTE: This concept note is a part of RGNUL-IPAN Working Paper Series. IPAN and RGNUL hold exclusive rights over its use and distribution. Unauthorised use of this document in any form is strictly prohibited. The views expressed here are of the Research Assistants involved in this project and don’t reflect those of International Policy Analysis Network (IPAN) or of RGNUL.

CONCEPT NOTE:
PART 1: INTRODUCTION
Foreign Direct Investment in retail has a major significance in the present economic setup of Indian economy. A major shift in the policy of Foreign Direct Investment (hereinafter referred to as FDI) climate has provided an interesting future option to several international retailers' entry and expansion plans for India. Foreign Direct Investment in multi-brand retail is an economic reform which would allow global chains like Wal-Mart, Carrefour and Tesco etc. to own up to 51 percent of joint retail ventures with Indian companies. The policy would let foreign retailers own up to 51 percent in multibrand retailing and 100 percent of single brand retailing.1 According to Deardoff’s Glossary of International Economics, FDI is defined as ―Acquisition or construction of physical capital by a firm from one (source) country in another (host) country.‖ 2 FDI is also stated as ―Investment that is made to acquire a lasting interest in an enterprise operating in an
1

Agencies, ―What‘s FDI in retail?‖ Hindustan Times, Nov. 29, 2012. Available at http://www.hindustantimes.com/IndiaDeardoff‟s Glossary of International Economics. Available at

news/NewDelhi/What-s-FDI-in-retail/Article1-775543.aspx, Last accessed on 14 October, 2012.
2

http://www-personal.umich.edu/~alandear/glossary/f.html#fdi2, Last accessed on 12 October, 2012.

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Concept Note

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economy other than that of the investor, the investor‘s purpose being to have an effective voice in the management of enterprise‖.3 It is the stated intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth. ―Foreign Direct Investment, as distinguished from portfolio investment, has the connotation of establishing a lasting interest in an enterprise that is resident in an economy other than that of the investor.‖4 Latest Policy Move: The policy cleared by Union Cabinet stipulates that FDI in multi brand retail will be allowed up to 51% foreign equity through the government approval route, subject to adequate safeguards for domestic stakeholders. The policy rollout will cover only cities with a population of more than 1 million5. It also specifies at least 30% of the procurement of manufactured/processed products must be sourced from Indian ―small industries‖. 'Small industries' have been defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million.6 Organized retail penetration remains low, at 5 to 6 percent indicating room for growth. 7 This provides ample space for multi brand retailers to setup and explore the retail investment environment in India.

3 4

International Monetary Fund, Balance of Payments Manual, Washington, DC, 1977, pp.408 Circular 1 of 2012, Chapter 1, P. 6, Intent and Objective, Dept. Of Industrial Policy and Promotion, Ministry Of

Commerce And Industry (Circular On Consolidated FDI Policy), Available At Http://Dipp.Nic.In/English/Policies/FDI_Circular_01_2012.Pdf, Last accessed on 14October, 2012.
5

Press Release Id 77725, Press Information Bureau, Government of India,

Available at http://pib.nic.in/newsite/erelease.aspx?relid=77725, Last accessed on 9 October, 2012.
6

Press Note No.4 (2012 Series), Ministry Of Commerce and Industry, Government of India.

Available at http://dipp.nic.in/English/acts_rules/Press_Notes/pn4_2012.pdf, Last accessed on 08October, 2012.
7

News release, 2012 Global Retail Development Index, June 11, 2012, AT Kearney, Global management consultancy Available at http://www.atkearney.com/consumer-products-retail/global-retail-development-index/news-release/-

firm.

/asset_publisher/56Fncka0K9JJ/content/brazil-tops-a-t-%C2%A0kearney-global-retail-development-index-for-thesecond-year/10192., Last accessed on 14October, 2012.

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Concept Note

IPAN Working Paper No.01/2012

What is Single Brand Retailing and Multibrand Retailing? Single brand retailing: its meaning says own label brands or they can be described as those which are created and owned by businesses that operate in the distribution channel. Single brand implies that foreign companies would be allowed to sell goods sold internationally under a ‗single brand‘, viz., Reebok, Nokia and Adidas. FDI in ‗Single brand‘ retail implies that a retail store with foreign investment can only sell one brand. For example, if ‗Nike‘ were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the ‗Nike‘ brand and not the ‗Reebok‘ brand, for which separate permission is required. Foreign direct investment in multi brand retail means that foreign players can sell multiple brands of his parent company in another country under one roof. Multi Brand Retail allows foreign companies to sell goods of more than one brand under one roof viz. Wal-Mart, Tesco etc. For example, in India, Pantaloons is a multibrand retail shop where if talked about garments, one can sell Reebok, Nike and Adidas under one roof only. It is only after Press release of Ministry of Commerce and Industry, that Foreign Direct Investment in multi brand retail is allowed8. Opening up FDI in multi-brand retail will mean that global retailers will offer a range of daily use items which are directly related to consumers in same way as other local ‗kirana‘ shops sell. History of FDI in Retail in India: The advent of FDI in general in India was witnessed during the end of 1990‘s when government announced number of reforms which helped in the process of liberalisation and deregulation of the economy. Since its inception there has been significant upsurge in the FDI flows in the country. But when we talk about FDI in retail, it came quite late in 2006. Prior to 2006, India prohibited FDI in both single brand and multi brand retail. In the second month of 2006, government decided to open retail sector for FDI which was subject to certain conditions. At

8

Press Note No. 5 (2012 Series), Dept. Of Industrial Policy and Promotion, Ministry Of Commerce And Industry 14-09-

2012. Available At http://Dipp.Nic.In/English/Acts_Rules/Press_Notes/Pn4_2012.Pdf, Last accessed on 07 October, 2012.

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Concept Note

IPAN Working Paper No.01/2012

that time government provided 51 percent FDI in single brand retail.9

There have been

recommendations to further liberalize the Indian government‘s policy regarding FDI in retail trading, including to increase the permissible level of FDI in single-brand retail operations and to open up the multi-brand retail sector to FDI. In November 2011, the Union Cabinet of Ministers, decided to permit up to 100 percent FDI in single-brand retail trading and up to 51 percent FDI in multi-brand retail trading. Unfortunately for foreign retailers, the Cabinet‘s November 2011 decision produced a considerable political backlash in India. The political backlash was mainly focused on multi brand aspect of the FDI. Consequently, the Indian government reversed course and indefinitely suspended plans to reform the retail sector. But later government of India on January 12, 2012 allowed 100 percent FDI in single brand retail 10 and still there was no FDI in multi brand retail in the country. Later amidst rising inflation, policy paralysis, risk of low grading by credit rating agencies and surging deficits, Government of India decided to allow 51 percent FDI in multi brand retail.11 General Nature of Indian Retail Sector: India is one of the most desirable retail destinations in the world due to a large middle class which has a dispensable income. India‘s economic growth and demographic profile set it apart from others Developing Nations and set up a case for global retailers to enter the market. Retailing is a significant sector of the economy, both in terms of GDP contribution and share in public employment. Although there is no set definition for retail but to opt for a reliable authority, the definition of retail was given by the Delhi High Court in the case of Association of Traders of Maharashtra V. Union of India12 defined ―retail as sale of final consumption or sale to ultimate consumer‖. A manufacturer selling his own brand is not retailing. Retailing is the bridge between the manufacturer and the final consumer and falls last in the distribution chain having interface with the end customer.

9

Press Note 3 (2006 Series), Issued On February 10, 2006, Issued By Dipp. Ministry Of Commerce And Industry.

Available At http://Www.Ksidc.Org/FDI_Policy_2006.Pdf, Last accessed on 06 October, 2012.
10

Press Note 1 (2012 Series), Issued On January 10, 2012, Issued By Ministry Of Commerce and Industry. Available At

http://Dipp.Nic.In/English/Acts_Rules/Press_Notes/Pn1_2012.Pdf, Last accessed on 07October, 2012.
11

Press Note 5 (2012 Series), Issued On January 10, 2012, Issued By Ministry Of Commerce And Industry. Available At

http://Rbidocs.Rbi.Org.In/Rdocs/Content/Pdfs/PRES210912_5.Pdf, Last accessed on 07October, 2012.
12

Federation Of Association Of Traders v. Union Of India, 2005 (79) DRJ 426. For Regular Updates, follow www.facebook.com/IPANglobal

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Concept Note

IPAN Working Paper No.01/2012

There is no definition of retail trade under the FDI policy. In layman‘s term it means selling of goods to the consumer. So from local Kirana shops and mall based shopping formats, both form part of retail sector. From street/cart retailers working on pavements/roadsides and small family run businesses to international brands such as Rolex and Nike, the retail market in India is vibrant, colourful and highly fragmented. In India, the retail industry is divided into organised and

unorganized sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. 13 Unorganised retailing, on the other hand, is dominated by large number of small retailers consisting of local kirana shops, owner manned general stores, chemists, footwear shops, paan or beedi shops, pavement vendors etc. which together make up the so called ―unorganised retail‖ or traditional retail14. At Kearney, a global management consulting firm, rates India as the most attractive nation for retail investment. The study, presented in the Global Retail Development Index of 2012, is carried out annually for 30 emerging markets, and has rated India fifth in all emerging markets. This report expresses even more optimism, and estimates that suggests that India's retail market is expected to be about US$535 billion by 2013, with around 10 per cent coming from organized retail.15. Indian retail is mainly dominant with small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets. Coming up of FDI in retail may see a significant shift in Indian retail industry. Key Features of the Policy: Following are certain conditions which have been specified under the Press Note no. 5 of 201216 and the foreign players have to comply with the same.

13

―Retailing, India In Business, Investment Technology Promotion Division, Ministry Of External Affairs, Govt. Of

India‖, Available at http://www.indiainbusiness.nic.in/industry-infrastructure/service-sectors/retailing.htm, Last accessed on 09 October, 2012.
14 15

Ibid ―Global Retail Expansion: Keeps On Moving 2012‘, Atkearny,

Available at http://www.atkearney.com/documents/10192/4799f4e6-b20b-4605-9aa8-3ef451098f8a, Last accessed on 14 October, 2012.
16

Press Note No. 5 of 2012, Govt. Of India, For Regular Updates, follow www.facebook.com/IPANglobal

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Concept Note

IPAN Working Paper No.01/2012

 As per paragraph 6.1 of the press note FDI is prohibited in : (a) Lottery Business, including Government /private lottery, online lotteries, etc. (b) Gambling and Betting, including casinos etc. (c) Chit funds (d) Nidhi company (e) Trading in Transferable Development Rights (TDRs) (f) Real Estate Business or Construction of Farm Houses (g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco Substitutes. (h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Foreign Technology Collaboration in any form, including licensing for franchise, trade mark, brand name, management contract, is also prohibited for lottery business and Gambling and Betting activities.  The above policy is an enabling policy only and the State Governments and Union Territories would be free to take their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in those States & union Territories which have agreed, or agree in future, to allow FDI in MBRT under this policy. The list of States &Union Territories which have conveyed their agreement is annexed. Such agreement, in future, to permit establishment of retail outlets under this policy, would be conveyed to the Government of India through the Department of Industrial Policy & Promotion and additions would be made to the annexed list accordingly. The establishment of the retail sales outlets will be in compliance of applicable State &Union Territory laws/ regulations, such as the Shops and Establishments Act etc.

FDI in retail is left to the discretion of state governments which will decide whether to allow foreign supermarket chains like Wal-Mart, Carrefour etc.to enter their territory or not.

Available at http://Rbidocs.Rbi.Org.In/Rdocs/Content/Pdfs/PRES210912_5.Pdf, Last accessed on 08October, 2012.

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IPAN Working Paper No.01/2012

 Minimum amount to be brought in, as FDI, by foreigner investor, would be US $ 100 million. Minimum investment to be made by foreign investor through any multinational is at least of $1 million. At least half of the total FDI shall consist of ‗back-end infrastructure‘ such as warehousing and cold storage facilities. This requirement has to be met within three years of a retailer setting up shop.  At least 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. This procurement requirement would have to be met, in the first instance, as an average of five years' total value of the manufactured! Processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis. The multinational investing in the country will have to source almost one third i.e. 30% of their manufactured and processed goods from industries with a total plant and machinery investment of less than $1 million.  Retail sales outlets may be set up only in cities with a population of more than 10 lakh (1 million) as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking..  Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multibrand retail trading. The Press Note
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5 provides that retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading. This would mean the web platforms carrying out enabling function shall not be impacted but foreign firms that buy or sell any goods or services on online portals are prohibited under the FDI policy17.  Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.  Government will have the first right to procurement of agricultural products.  At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI, where 'back-end infrastructure' will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of back end infrastructure. At least half of the total FDI shall consist of ‗back-end infrastructure‘ such as warehousing and cold storage facilities. This requirement has to be met within three years of a retailer setting up shop.  Applications would be processed in the Department of Industrial Policy & Promotion, to determine whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for Government approval.  There are few states and union territories which have agreed to allow FDI in multibrand retail:: States: Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand; Union territories: Daman & Diu and Dadra and Nagar Haveli.
17

Nidhi Bothra, ―FDI in Retail Business: The Key Issues of New Policy”, Moneylife, Sep. 26, 2012. Available at

http://www.moneylife.in/article/fdi-in-retail-business-the-key-issues-of-the-new-policy/28689.html, Last accessed on 07October, 2012.

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There has been a sort of mixed response by policy analysts and corporate masters. Corporate professionals like Akash Gupta (retail expert at consultancy firm PricewaterhouseCoopers India Ltd.), estimates that opening up the retail sector will lead to significant improvement of supply-chain infrastructure, which will help reduce food waste by 30% to 40%. Adi Godrej, president of the Confederation of Indian Industry, a leading trade body, said coming up of FDI in retail announcements have ―restarted the reform process‖18.

18

WSJ Staff, ―FDI in retail: The End of Policy Paralysis‖, The Wall Street Journal. Available at

http://blogs.wsj.com/indiarealtime/2012/09/14/india-reacts-the-end-of-policy-paralysis/, Last accessed on 06October, 2012.

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PART 2: INDIAN RETAIL: WHAT MAKES IT UNIQUE?
It is considered that unorganized Retail is the second step after agriculture for those seeking to climb the ladder of affluence and in search of higher income.19 The traditional Indian retail sector is highly fragmented,20 mainly consisting of small, independent and family managed stores/ventures. The domestic organized retail industry is also at a nascent stage. The factors which affect the sector at the macro level are the growth of nuclear family structure and the rise of consumerism among the youth.21 Over the last few years a number of business houses in India 22 have started invested in the field of retail either through the acquisition of existing businesses or through fresh investment. These business houses include The Aditya Birla Group, Reliance and the Bharti Group.23 Organised Retail in India by Domestic Players: The advent of the domestic business houses in the retail scenario has led to a huge change in the domestic retail business scenario due to their deep pockets.24 The focus of the new entrants to the field of retailing is to capture the eyeball of the customer by providing maximum value coupled with modern business principles. The new retailers aim to bring in maximum number of repeat customers and build a stable base. Although the primary differentiator between the different businesses is price of the products, however the retailers aim to build their own identity through the following main ways 25: (i) (ii)
19

By improving sourcing and distribution efficiencies; By expanding the product portfolio;

Kamaladevi Baskaran, ―The Fdi Permit for Multi Brand Retail Trading in India - Green Signal Or Red Signal‖, Natika Jain, ―Consumer Behaviour at Retail Outlet/ Shopping Mall”, Tirpude‟s National Journal of Business Research, Mathew Joseph, Nirupama Soundararajan, Manisha Gupta, Sanghamitra Sahu, ―Working Paper No. 222 Impact of Manju Smita Dash, ―Next-Generation Retailing In India: An Empirical Study Using Factor Analysis‖, International

Business Intelligence Journal - January, 2012 Vol.5 No.1, p. 176-186.
20

Vol. 2 Issue 1, p. 1
21

organized Retailing on the Unorganized Sector‖, Indian Council For Research on International Economic Relations, 2008
22

Review of Management and Marketing ,Vol. 1, No. 2, 2011, p. 29
23 24

Retail Insights, Available at http://www.dnb.co.in/IndianRetailIndustry/insight.asp , Last accessed on 12October, 2012. R.Y Naryanan, Temper Expectations from Retail Story, Available at http://www.thehindubusinessline.com/markets

/article3910762.ece , Last accessed on 11October, 2012.
25

Retail Advantage India, IBEF, November, 2010. For Regular Updates, follow www.facebook.com/IPANglobal

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Concept Note

IPAN Working Paper No.01/2012

(iii) (iv)

Providing personalised customer services Creating a unique store ambience.

The Indian Retailers who have established stores till date have tried to build a strong sourcing and distribution network across the country to ensure that they can ensure consistent and stable supplies of their products. The retailers however had a few teething problems which also resulted in a few players falling out of the market. However, a few players have emerged strong and look to take homegrown organised retailing into the coming years. The Indian home grown organised retailers have also tried to consistently tried to widen their product portfolio to bring in more variety for the customers. A few players such as Big Bazaar have consistently ventured into new areas such as electronics and furniture to provide greater variety to the customers across different product segments. The growth of organised retail in India has also prompted the players to bring about changes to ensure customer retention and loyalty. To ensure a steady footfall the businesses have started loyalty programs and also promotion schemes including branded credit cards and point redemption schemes. The organised retail sector has also seen constant modifications in the store designing and maintenance strategies to keep up with the changing consumer preferences. The stores have consistently tried to innovate with new product presentation and display strategies with an eye to attract customers across age groups and spending capacities. Growth in the Domestic Indian Retail Sector
The last decade has seen a sea change in the field of Indian retail. India's retail sector is estimated to touch US$ 833 billion by 2013 and US$ 1.3 trillion by 2018.26 At present the retail sector contributes 10% to our GDP and is the largest provider of employment after agriculture. The dynamics of the Indian retail sector relating to political, social or economic environment has seen stark changes over time which has been primarily led by the change in consumption patterns. The new millennium has seen a clear bifurcation of the sector into organise and unorganised retail sectors.27 The fastest growing segments have been the wholesale

26

Tazyn Rahman, ―Organized Retail Industry In India – Opportunities And Challenges”, International Journal of Sanjay Manocha and Anoop Pandey, ―Organized Retailing in India : Challenges and Opportunities‖, VSRD-IJBMR,

Research in Finance & Marketing, Volume 2, Issue 2 (February 2012) , p. 83
27

Vol. 2 (3), 2012, 79

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Concept Note

IPAN Working Paper No.01/2012 cash and carry stores (150 per cent) followed by supermarkets (100 per cent) and hypermarkets (75-80 per cent). 28

Pattern of Retail Growth In India The growth of the retail sector in India has been highly skewed to the urban sector and primarily metropolitan cities due to the high population density and large populations. On comparison between the different states across the country, it is found that the south Indian states of Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, lead the way followed by the prosperous West Indian states of Maharashtra and Gujarat. The new wave of retail in India has now spread it to the peripheries of the National Capital region and the prosperous states of Punjab and Haryana. The trend of modern retail in the late 1990s29 started in the southern region as South India has clusters of metro cities and tier-1 towns. Further, the licensing process in states such as Andhra Pradesh, where the licensing process is now online, has greatly reduced the time lag.30  Mode Of Entry Into Retail Route

In India, the main players of organised retail have entered into the market through the following modes: (a) the acquisition route which gives a jump-start to take advantage of the already experienced manpower, infrastructure, front-end property of the acquired firm; Ex: Spencers acquired by RPG.31 (b) the JV partnerships, a preferred route for firms seeking foreign collaboration for technical know-how and assistance in the back-end operations as well as future export opportunities. Ex: Bharti Wal-mart India32 (c) New venture route for market entry. Ex: More Stores33
28 29 30

Ali Asgar Motiwala, Growth of Malls in India, US Commercial Service. Rohit Bhasin and Bharti Ramola, Winning in India‟s Retails Sector, PwC, Mumbai, Unknown. Available at http://www.indianexpress.com/news/retailers-want-single-window-clearance-for-setting-up-

outlets/205068/, Last accessed on 11October, 2012.
31 32

Available at http://www.spencersretail.com/cms.php?page=milestones , Last accessed on 10 October, 2012. Available at http://ibnlive.in.com/news/bhartiwalmart-will-be-a-5050-pc-partnership-rajan-mittal/296496-7.html , Last

accessed on 11October, 2012.
33

Available at http://www.morestore.com/abt_retail.html , Last accessed on 12 October, 2012. For Regular Updates, follow www.facebook.com/IPANglobal

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IPAN Working Paper No.01/2012

(d) Mixture of Acquisition and JV routes for quick market access. To take advantage of the second wave of business now, the firms have moved into the formation of subsidiaries or specialised stores targeting a particular population group. The firms are normally present in one or both of the segments: lifestyle and value retailing under multiple retail formats except for a few exceptions which target only one of the sectors. The leaders in the Indian Retail sector are adopting a combination of formats including, mega (hyper and/or super), medium (department and/or speciality), and small size (convenience and/or discount) for expansion. Rapid expansion by the firms helps them to: (i) (ii) (iii) Attain a large size increasing the bargaining power; Economies of scope in sourcing by accruing costs across stores; and Reach out to consumers at their doorsteps.

Understanding the way Indian Mega Retailers Run Through this section we look into the important players of the organised retail market in India which are run by the Indian business houses. The mega retailers follow an overall common strategy irrespective of the type of product segment or market and a representative of each of the prevalent models is taken for a case study. The main objective of these case studies is to understand how these firms are planning to34: (i) (ii) (iii) (iv) (v) Penetrate markets and build market share; Introduce multiple product and format categories; Operate the chain from sourcing to marketing; Create product identities through prices Capture customer footfalls.

In India, the main formats prevalent among the retail stores are studied below in relation to store sizes and their business identities. The formats prevalent in retail sector are35:-

34 35

Ibid The IPAN SALE working group has taken these figures from (a) Working Paper No 222, Impact of Organized

Retailing on the Unorganised Sector, ICRIER, Indian Brand Equity Foundation, Retail, 2010. p. 8, (b) Rohit Bhasin and

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Type of Store 1. Restaurant Chains

Store Size As required

Description The chains mainly particular cuisine operate and mainly

Examples Ratna,

restaurant Sagar

cater Mainland China, to a O Calcutta

in the high-end segment. 2. Hypermarket 50000- 100000 Offer a sq. Ft. Spencer, Big

large basket of Bazar, Easy Day products, ranging grocery, and from fresh Market

processed

food, beauty and household products, clothing and

appliances, etc. 3. Cash format) and Carry (B2B More than Focussed on Metro Cash and Bharti-

75,000 sq. Ft

bulk buying and Carry, selling of Walmart

Bharti Ramola, Winning in India‟s Retails Sector, PwC, Mumbai , (c) Ms. Vidushi Handa And Mr. Navneet Grover, ―Retail Sector In India: Issues & Challenges‖, Zenith International Journal of Multidisciplinary Research, Vol. 2, Issue 5, May 2012, p. 256, (d) Aditya P. Tripathi, ―Emerging Trends in Modern Retail Formats & Customer Shopping Behavior in Indian Scenario: A Meta Analysis & Review‖, Unknown, p. 10 (e) Tazyn Rahman, ―Organized Retail Industry In India – Opportunities And Challenges”, International Journal of Research in Finance & Marketing, Volume 2, Issue 2 (February 2012) , p. 85 and (f) Sanjay Manocha and Anoop Pandey, ―Organized Retailing in India : Challenges and Opportunities‖, VSRD-IJBMR, Vol. 2 (3), 2012, p. 75 to design this table providing the division of different types of retail formats. In addition to the existing concepts provided in the mentioned papers, a few formats have been added by the research team itself.

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IPAN Working Paper No.01/2012

commodities. Have buying requirements. 4. Departmental Stores 10,000- 60,000 Wide range of Westside, sq. Ft merchandise mix, usually in cohesive categories, such as fashion Reliance Trends. bulk

accessories, gifts and home Furnishings, but skewed towards garments. These stores are

focused towards a wider Consumer audience catchment, with in-store services as a primary Food

differentiator. 5. Super Markets 3000-25000 sq. Offer household Nilgiri‘s, ft36 as well as food Bazar. products. Aim to be one stop shop for daily needs. 6.
36

Shop-in-shop

No fixed size. Offer specialised Spice

Mobile

Available at http://www.igd.com/index.asp?id=1&fid=1&sid=7&tid=26&cid=94, Last accessed on 11October, 2012. For Regular Updates, follow www.facebook.com/IPANglobal

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IPAN Working Paper No.01/2012

Normally smaller

products with a Store, than shop within a Travel Shop mall.

The

supermarkets 7. Speciality Stores 2000-5000 sq. ft

Speciality stores Archies, Ferns n are category, focusing on single- Petals, Mom and Me

individuals and group clusters of the same class, with high

product loyalty. Typical examples such format are: Footwear stores, music electronic household stores, gift stores, and of retail

stores, food and Beverages retailers, even and focused

apparel chain or brand stores. 8. Category Killers Average 8000 sq. ft size Category killers Mochi, Kromefocus on a Republic Fashion of

particular segment and are

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able to provide a wide range of choice to the

consumer, usually affordable prices due to at

the scale they achieve. They that offer less variety but deep assortment merchandise. 9. Discount Stores Average 1000 sq. Ft Size Offers wide range of products, mostly branded at high rates of discount. Primarily provide discounts Convenience Stores37 by The Loot, Koutons, Liverpool of

selling in bulk. 10. 400-2000 sq.ft Located near Safal, 6ten,

Residential areas Subhiksha, in thickly Mother Diary

populated areas. stores For easy access and daily

37

Ms. Vidushi Handa And Mr. Navneet Grover, ―Retail Sector In India: Issues & Challenges‖, Zenith International

Journal of Multidisciplinary Research, Vol. 2, Issue 5, May 2012, p. 256

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purchase. 11. Round the clock stores No fixed Floor Focussed area providing necessities with availability throughout the on 24 x 7, In and Out

day. Some sell Liqour.

We have taken a representative brand from the segments mentioned above and have tried to evaluate the brand from the parameters we have stated before. The flowing chart evaluates closely the strategies taken by the market leaders from all the above mentioned segments for maintaining their growth and market share in India. Brand Category Restaurant Chains Brand Name Dominos Brand Information Owner: Jubilant Foodworks Limited Business Model: Franchisee Market Strategies Growth Size in India Focuses on a product line More than 500 covering all segments of the stores across and

market from value for money to more than 110 premium. Captured the delivery cities in India. market with timely delivery Market leader in guarantee.38 Have constantly both organised of focused on consumer-centric Pizza such as product and market Home

Dominos Pizza areas International

innovation, taste, pricing and Delivery

38

Ratna Bhushan, Domino's, Pizza Hut use delivery and dine-ins to whet the taste buds of demanding Indians, Available http://articles.economictimes.indiatimes.com/2012October, 10/news/34363627_1_dine-in-stores-yum-restaurants-

at

pizza-hut, Last Accessed on 12October, 2012 at .

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based in USA

customer service.39 To increase Markets share in dine in

with

market 55% and 70 % larger respectively.41

Domino's is upgrading its dine- share in stores, allocating

spaces for them and foraying Income of Rs. into new cities. 40 3145 million in 1st Quarter of FY 2013.42 Hyper Market Big Bazaar Owner: Pantaloon Retail Limited Business Model: Coined the 3 C strategy: More than 164 and stores in India

Confidence,

Change

India Consumption.43 Has succeeded in Big Bazaar largely due to its emphasis on Format.45 consumer behaviour and Total income of

understanding the diversity of Rs. 7317 crores

Wholly Owned Indian consumers. Further, it is in 2011-2012.46 Subsidiary products driven where the focus is on the front end to serve the consumers well. Additionally, the business model is based on low margin and high turnover. The shops offer products from numerous categories spread across multiple floors.44

39

Drypen, Domino's Marketing Strategies – Says, Affordability is the key to survival in India market,

http://drypen.in/branding/dominos-marketing-strategies-says-affordability-is-the-key-to-survival-in-india-market.html, Last accessed on 09October, 2012
40 41 42 43

Id at 22. Press Release, Jubilant Foodworks Limited, August 30, 2012. Earnings Presentation, Jubilant Foodworks Limited, Q1 FY 13, July 25, 2012 Priya Kumar, The Story of Big Bazaar, Available at http://www.chillibreeze.com/articles_various/the-story-of-Big-

Bazaar-611.asp, Last accessed on 11October, 2012.
44

Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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Cash Carry

and Best Price Owner: Bharti Focussed on wholesale of more More than 15 Modern Wal-Mart India than 5000 products.47 Primary stores in India. target are the retailers who sell Sales the products to the end 1876 with increase sales.48 of Rs. crores 143% in

Wholesale Pvt. Ltd

consumer.

Departmental Westside Stores and Trent

Owner: Group

Tata Retailing

of

clothes

and More than 106 stores.

lifestyle products under one group roof.

Total operating income exceeding 19000 lakh. Rs.
49

Super Markets

Food Bazar

Owner: Pantaloon Retail Limited Business Model: Wholly Owned Subsidiary

Sale of Food Product and Sales Groceries at affordable prices not

revenue separately

India and sale of product through available. private brands to maximise profits.

45

Raghavendra Kamath, Makeover at Big Bazaar, Available at http://www.business-standard.com/india /news/ makeover-

at-big-bazaar/483456/, Last accessed on 14October, 2012.
46

Kala Vijaya Raghavan & Sagar Malviya, Future Value to be merged with Pantaloon Retail to cut operating cost,

Available at http://articles.economictimes.indiatimes.com/2012-09-10/news/33737171_1_big-bazaar-pril-kb-s-fair-price, Last accessed on 14October, 2012.
47 48

Available at http://www.bharti-walmart.in/Ourstores-Overview.aspx, Last accessed on 12October, 2012. Sagar Malviya, New stores, rising sales fail to boost Bharti Walmart's net worth, Available at

http://articles.economictimes.indiatimes.com/2012-05-22/news/31814426_1_bharti-walmart-multinational-retailers-firstcash-and-carry-store, Last accessed on 12October, 2012.
49

Audited Financial Results, Trent Limited, For the financial year ended 31 st March, 2012. For Regular Updates, follow www.facebook.com/IPANglobal

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Concept Note

IPAN Working Paper No.01/2012

Speciality Stores

Archies India

Archies Limited.

India Sale of greeting cards and gifts Selected through special stores. Superbrand 2009-10.50

as in

Market leader in organised sector with share.51 60% Sales

revenue of Rs. 180 crore
52

in

2010-2011.

Through a comparison of the different players across the various segments mentioned in the chart given above, a few common factors can be drawn which are enumerated as follows: (a) Almost all of the above mentioned retailers have taken an aggressive expansion strategy with a primary aim to build an economy of scale. (b) The retailers are moving into smaller towns to capture a wider customer group and the growing Indian middle class. (c) Many of the players have a market share exceeding 60% in their sector which might show the need for greater variety for customers and an opportunity for new players. In addition to the formats of retail provided above, the Indian market has seen the emergence of a few new and unique formats such as Quasi Mall by Shoppers Stop and Corner Shop by Globus. 53 In addition to the urban retail stores, the Indian players have also innovated by rural area specific

50

Available at http://www.archiesonline.com/gateway/archies_superbrand_article.php, Last accessed on 10October,

2012.
51

Available

at

http://www.archiesonline.com/gateway/hallmark/Archies-tie-up-Hallmark.php,

Last

accessed

on

10October, 2012.
52

PTI,

Archies

eyes

Rs

400

cr

sales

in

4

years,

launches

UNICEF

cards,

Available

at

http://www.thehindu.com/business/companies/article2435761.ece, Last accessed on 10October, 2012.
53

Poonam Kamboj, "Indian Retail Industry: Its Growth, Opportunities And Challenges", IJRFM, Vol. 2, Issue 2

,February 2012, p. 297

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hypermarkets such as ITC‘s E- Choupal and HLL's project Shakthi and Mahamaza. This shows a continuous process of innovation and experimentation by the Indian retailers. Nature of Indian Consumerism The Indian retail sector is frequently referred to as a gold mine which is ready to be tapped by the most efficient businesses.54 The primary target of the marketers is an untapped consumer group with growing spending power and India provides them that opportunity. The commonly attributed reasons for the growth of the retail market in India have been: Rapidly increasing income level, Change in lifestyle, Favourable pattern of geography, Retail offering one roof shopping experience, Increase in the number of nuclear families, Improved purchasing power of Indian middle class, Presence of domestic and foreign player, Effect of Liberalization, Privatization, and Globalization.55 In one of the few empirical research studies undertaken on the topic, conducted by Swati Kewlani and
Sandeep Singh among a random group of 150 people in Indore, India has revealed that consumers go

to shopping malls for the variety they get there and because ―they find shopping entertaining due to good environment, and variety of products that they get there, reasonable price that are offered along with the better quality of services rendered.‖ No doubt the big giants are giving tough competition to small retail store, but consumers are still in favour of small retailers.
56

The study has

revealed that consumers prefer to buy consumer care and daily use products from shopping malls. However, it has further revealed that they continue to buy from small retailers, and they spend equally on buying from kiranas. The study listed a few benefits of local kiranas stated by the surveyed people which are listed below: (a) They are going to small retailers due to their long standing relations with them, the home delivery services that the small retailers offer and because they find shopping less time consuming while shopping with small retailers as compared to malls.

54

B.D. Singh & Sita Mishra, ―Indian Retail Sector- HR Challenges & Measures for Improvement‖, Indian Journal of Chandu. K. L , ―The New FDI policy in Retail in India: Promises, Problems and Perceptions”, Asian Journal Of Swati Kewlani and Sandeep Singh, “Small Retailers Or Big Shopping Malls: Will Big Fishes Eat The Small?” Journal

Industrial Relations, Volume 44 Issue 1, 2008.
55

Management Research, Volume 3 Issue 1, 2012 , p.100-106
56

of Radix International Educational and Research Consortium, Volume 1, Issue 2, February 2012.

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(b) When the respondents were asked whether they go to small retailers because of the relationship they have developed over the period of time with them more than half (52%) responded were with affirmation, thus clearly underlining the dictum that relationship marketing hold the key to the survival of the minnows, which is emerging to be the U.S.P. of these small retailers. The authors also listed a few points why the kirana shop will be relevant even in the changed retail landscape: Firstly, the location of the shop at the neighbourhood allows for easy purchase of items at short intervals without the need of detailed travel plans. Secondly, there is a long friendly relationship with the neighbourhood kiranawalla based on mutual trust. Thirdly, the shopkeeper offers free home delivery under most circumstances. Fourthly the small shopkeepers provide easy credit on the items of daily use and the amount is paid at a fixed flexible interval by the customer enabling a lasting relationship. Further, it is a commonly stated fact the Indian customer looks into the value for money aspect of a product before a purchase decision which would make product differentiation on the basis of price a key factor for any player coming into the market. The main challenge before the Indian organised retail sector is to cope with the customer expectations of the Indian customer who has till date been served at home by the Kirana shop. The kirana shop provided convenient location, personalised location and easy credit. The Indian organised retailer will have to come up with new and innovative platforms to tackle the kirana store challenge and some factors such as instant credit will be a challenge for even the biggest players due to the varied Indian conditions. Understanding the tastes and preferences to suit the local needs might also need some time for the Indian organised retailer. A possible way to tackle the challenge might be to include representatives of the local area in the business structure.

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Challenges Faced By the Organised Retail Sector In India The challenges faced by a new and emerging business sector are many and new hurdles seem to emerge with the expansion of the business. However, for the purpose of the study we have tried to list a few of the major hurdles faced by the organised retail sector till date in its relatively short journey in India:  Political Opposition The Indian political scenario is crowded with varying opinions about organised retail and its possible impact on the Indian customer. A number of views have been put forward regarding organised retail contributing to unemployment in the country and its possible impact on the small Kirana shop owner. Different states around the country have varied policies on organised retail and investment by business houses in certain states have even been met with violent opposition As such a uniform policy across the country is absent presenting a huge hurdle to the major players in the country. 

Supply Chain India is the seventh largest country in the world with varying climatic conditions and consumer preferences across the country. The basic infrastructure of roads and availability of storage facilities is not standard across the country which presents a huge challenge to the investors. Infrastructure has been developed at priority in the last decade and it is hoped that a planned expenditure of US$ 1 trillion in the 12th five year plan will help bridge the infrastructure gap in the country. A strong supply chain is the immediate need of the hour and any new player will have to build the supply chain to a large extent from the scratch.

Channel Conflicts One of the primary modes by which the organised retails sector reduces costs worldwide is by agreements with the producers and distributors of products. In India, however, the existing supply model has been built with the small retailer in mind and a huge hurdle exists before the organised retail sector to tackle the varied distribution system across the country. 57 Further.

57

Indian Retail Market: Changing with the Changing Times, Deloitte, August, 2010. For Regular Updates, follow www.facebook.com/IPANglobal

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India also has varied taxation laws across the country with different rates of local taxes which needs to be looked into by the retailers. 

Location and Rental Rent forms a large portion of the total expenditure of any organised retail business in India. 58 Indian property rentals are sometimes exorbitant in the prime areas thus putting a strong pressure on viability.59 The challenge for a retailer would be to find the right location for their stores and select properties which do not impact their bottom-line. Certain retailers have taken to developing their own properties keeping an eye on the savings in the long run.60

Understanding the unique Indian Customer The Indian consumer has varied tastes and is primarily value oriented and pricing is critical in the country.61 Further, the tastes vary across the country. Thus, a particular product may be a best seller in one area while might not sell in the other state. The organised retailer has to identify the tastes of the different areas and cater to the varied demands 62 which might lead to lesser volumes and lesser bargaining power. Further, the Indian customer also has a preference for fresh products and the retailers would have to modify their strategies to suit such preferences.63

Regulatory measures As mentioned before, the Indian tax structure varies to a large extent among the different states and Goods and Service Tax which is likely to be implemented in 201364 will replace a

58

Malls and Hyper Markets: Perspectives of Contemporary Shopping, School of Management Studies, Punjabi

University, Patiala, p. 40
59 60

Nargundkar Rajendra, Services Marketing: Text and Cases, Tata McGraw Hill, New Delhi, 2010, p. 348 Ratna Bhushan & Rasul Bailay, Tata, Reliance join retail rush, plan to build shopping malls across the country, at http://articles.economictimes.indiatimes.com/2012-07-11/news/32632952_1_malls-retail-space-retail-

Available
61

formats, Last accessed on 12 October, 2012. Amisha Gupta, ―Foreign Direct Investment In Indian Retail Sector: Strategic Issues And Implications‖, IJMMR,

Volume 1, Issue 1 (December, 2010) , pp. 56
62 63 64

Ramaswamy VS, S Nakamuri, Marketing Management, Macmillan Publishers India Limited, New Delhi, 2009 p. 272 Unknown, The Great Indian Bazaar, McKinsey and Company, Mumbai 2008, p.22 GST rollout likely in 2013-14: Modi, Available at http://www.financialexpress.com/news/gst-rollout-likely-in-201314-

modi/938756/, Last accessed on 11October, 2012.

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host of levies like excise, sales tax, value-added tax, entertainment tax and luxury tax. Further, starting a new business venture in India requires a number of licenses, which have to be obtained from different government departments leading to considerable lead time in opening up of the stores.65 

Slow acceptance of private labels Private labels enable retailers to offer products at better prices due to the removal of the high cost brand names. Further, it lets the retailer package their own products middlemen and enhances bargaining power with supplier. In-house brands account for 12-15% of sales and more than 20-25% of profits for most Indian retailers which is very low compared to the global mark of earning 55-60% of revenues from private labels.
66

The concept of private

labels has however not captured the desired attention in the Indian market which in certain sectors shows a high brand loyalty thus reducing the options for the retailers. 

Absence of trained labour force Indian retailing faces the challenge of lack of trained manpower67 and the new employees which are employed by the companies have to be trained in the sector, thus increasing the cost for the companies which employ the workers. Further, lack of past experience reduces efficiency. Further, the sector sees high attrition levels due to shortage of quality manpower.

65

Laxmikant S. Hurne, ―Proposed FDI in Multi-Brand Retailing: Will it heat the Indian unorganized Retail Sector?‖,

Review Of Research, Vol.1,Issue.VI, March, 2012, p.3
66

Sagar

Malviya

&

Sarah

Jacob,

Private

labels'

euphoria

subsides

in

retail,

Available

at

http://articles.economictimes.indiatimes.com/2011-06-13/news/29653341_1_private-labels-spencer-s-kampani-ceothomas-varghese, Last accessed on 14 October, 2012.
67

Frost and Sullivan, Overview of The Indian Retail market, 2008 , p. 7 For Regular Updates, follow www.facebook.com/IPANglobal

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PART 3: EVOLUTION OF ORGANISED RETAIL WORLDWIDE
Retailing has come to be recognized as a discipline due to rapid growth in market coverage and investments in this sector in India and the world. There are various factors responsible for retail revolution across the globe, including in India. The demographic profile of the consumer has changed and due to economic development and increased income level he has become affluent. Also it has been observed that the powers have slowly started moving out of brands into retailer‘s hands due to their proximity with customers and improvements in customer service. The emergence of private labels will substantiate this fact. All the mass produced products are being served to mass consumers through retail platforms allowing the customer to choose from wider assortments. There has been revolution in retail industry. The India Retail Industry is the largest among all the industries, accounting for over 10 per cent of the country‘s GDP and around 8 per cent of the employment. The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. The industrial revolution necessitated dramatic changes on the retail front. The increase in urbanization meant that consumers were now clustered .in small geographic areas. These led to the emergence of shops to serve the needs of locals. 68 The number of consumers increased and mass transportation became a way of life. Mass manufacturing, longer distribution channels and mass merchandisers evolved. Retail evolved in many ways over the 20th century. Self service, a concept started in 1916 helped the retailer in reducing costs, as fewer workers were required to service the customers.69 The emergence of the supermarkets during 1930s, discounted stores and hypermarket like Carrefour in France in 1963 indicated retail boom. As the needs of consumers grew and changed, one saw the emergence of commodity specialized mass merchandisers in 1970.70 The seventies also witnessed the use of technology in the retail sector with the introduction of the barcode specialty chains developed in the 80s as did large shopping malls. In 1995 the world of retail opened the doors

68 69

Andrew Edgecliffe Johnson, ―A Friendly Store from Arkansas‖, Financial Times, 19 June 1999. Wal-Mart Associate Handbook, Available at http://walmart.3cdn.net/594f2e1e559832379c_k3m6bh9d8.pdf, Last

accessed on 16 October 2012.
70

Annual Report, Wal-Mart Stores, Inc. (1971-2001), Available at http://stock.walmart.com/annual-reports, Last

accessed on 16 October 2012.

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to global market on the web. With the growth of the World Wide Web, both the retailers and consumers can find suppliers and products from anywhere in the world.71

Factors which Assisted the Growth of Global Organised Retail In western states, rise of organised retail globally has been attributed towards urbanization, and positive change brought in by post world war situation and some of the growth factors of organized retail can be listed as72:1. 2.

Increase in per capita income which in turn increases the household consumption Demographical changes and improvements in the standard of living Change in patterns of consumption and availability of low-cost consumer credit

3. 4. 5.

Improvements in infrastructure and enhanced availability of retail space Entry to various sources of financing Advent of information technology

Lehman Brothers analysts have noted Wal-Mart‘s ―leading logistics and information competencies‖.73 The Financial Times has called Wal-Mart ―an operation whose efficiency is the envy of the world‘s storekeepers‖. Wal-Mart and other such ―big-box‖ retailer‘s competitive edge is driven by a combination of conventional cost-cutting and sensitivity to demand conditions and by superior logistics and distribution systems. The chain‘s most-cited advantages over small retailers are economies of scale and access to capital markets, superior logistics, distribution, and inventory control. These big retailer‘s cost-savings extend to its employment practices; many have been accused of requiring employees to work off the clock and using illegal-immigrant labor (through contractors).74 Such practices, if true, could reduce these retailers‘ measured employment without reducing its actual labor inputs. Big retailer‘s low wages are also said to contribute to its measured productivity. While Wal-Mart and such other companies‘ wage data are not publicly

71 72

Thomas L Friedman, The World Is Flat: The Globalized World in the Twenty-First Century, Penguin Books, 2007. J.R. Graham, ―Marketing Strategies for Businesses that are more ‗Bricks‘ than ‗Clicks‘‖, The American Salesman, Vol. Emek Basker, ―Selling a Cheaper Mousetrap: Entry and Competition in the Retail Sector‖, Draft report University of Steven Greenhouse, ―Suits Say Wal-Mart Forces Workers to Toil off the Clock‖, New York Times, 25 June 2002. For Regular Updates, follow www.facebook.com/IPANglobal

45 No. 9, 2000, pp. 19-25.
73

Missouri, January 2004.
74

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Concept Note

IPAN Working Paper No.01/2012

available, several sources estimate the current typical hourly wage of a Walmart ―associate‖ to be $7-$8/hour.75 These wages are on par with wages paid by other large discount chains (like K-Mart and Target), but are typically below union rates. To look into the explicit reasons behind the growth of organized retail, it would be convenient for us to look into the growth of specific model, Wal-Mart is frequently referred as ―King of Inventory Management‖, as the company keeps lesser inventory in comparison to it peers, reason attributed not only to economy of scales that it has over other competitors but also scientifically advanced supply chain management which gives corporation an edge over its competitors, forget small traders (mom & pop store keepers). Many case studies have been conducted to decode the same, one of the most cited one was published by Harvard Business Review, in which the whole supply chain management was referred as Rocket Science.76 Specific departments in these corporations work to reduce per/piece cost so as to contain the cost at such a low level which cannot be met by small retailers, thus eventually driving them out of competition. In short, Business analysts explain Wal-Mart's success as a function of four major factors: a big box format,77 everyday low pricing, efficiency in logistics,78 and competitive intensity.79
75

Virginia Postrel, ―Lessons in keeping Business Humming, Courtesy of Wal-Mart U‖, New York Times, 28 Feb. 2002, Marshall L Fischer, Ananth Raman and Anna Sheen Mcclelland, ―Rocket Science Retailing Is Almost Here, Are You

At C2.
76

Ready?‖, Harvard Business Review, July-August, 2000.
77

The "Big Box Format" is the principle of how "Larger stores increase sales per square foot by encouraging customers

to buy additional goods, often on impulse. Big-Box Stores also let retailers spread fixed labor costs like store management and cleaning crews across more sales.".
78

One of Wal-Mart's greatest achievement is its use and development of it applications:

It is widely regarded as the leader in the use of it in retail and pioneered a number of it applications including, for example: Early adoption of computers to track inventory in distribution centers (1969),Use of computer terminals in stores to facilitate communication (1977),Scanning using UPC codes (1980),Ground-breaking use of electronic data interchange (1985), Satellite communications network (1987),Use of radio frequency (rf) guns (late 1980s), Expansion of the edi system to include an extranet, which became an early form of escm (beginning in 1991), Development of 'retail link,' a micro-merchandising and supply chain management tool (beginning in 1991), As with its managerial innovations, these innovative uses of it improved Wal-Mart's productivity (both capital and labor) and cost position. They also resulted in continued market share gain due to their contribution to lower prices, lower out of stocks, and more effective merchandising. Mckinsey & Co., US Productivity Growth, 1995-2000 1, 2001, Available at http://www.mckinsey.com/mgi/reports/pdfs/productivity/retail.pdf, Last accessed on 07 October, 2012.

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Comparison of these Factors with Indian Context Most of the retail sector in India is unorganised, which are popularly referred as mom-pop stores. The biggest advantage in this sector is the consumer familiarity that passes on from one generation to the next. The transformation stage of the retail sector started in late 1990‘s. The emergence of pure retailer has started at this stage as it is been perceived as a beginner and the organised retailing is getting more attractive. In India, the retail business contributes around 14 percent of GDP in 2011.80 Of this, the organized retail sector accounts only for about five to six percent share, and the remaining share is contributed by the unorganised sector. The main challenge faced by the organised sector is the competition from unorganized sector. An important aspect of the current economic scenario in India is the emergence of organized retail. There has been considerable growth in organized retailing business in recent years and it is poised for much faster growth in the future. Major industrial houses have entered this area and have announced very ambitious future expansion plans.81 Transnational corporations are also seeking to come to India and set up retail chains in collaboration with big Indian companies. However, opinions are divided on the impact of the

growth of organised retail in the country. Factors responsible for the growth of organised sector do have applicability in Indian context also, as the growth factors of organized retail are: Increase in per capita income which in turn increases the household consumption

Increasing per capita income is one of the reason that has enabled foreign and domestic investors to invest in organised retail, as with the rise in income there is bound to be rise in living standard of people, and India has witnessed unprecedented growth post liberalization thereby realization of higher income by households.82

79 80

Ibid. ‗Global Retail Expansion: Keeps On Moving 2012‘, Atkearny, Available at

http://www.atkearney.com/documents/10192/4799f4e6-b20b-4605-9aa8-3ef451098f8a, Last accessed on 14 October, 2012.
81 82

RIL, RPG, Videcon, Bharti-Airtel, Aditya Vikram Birla Group, etc., to name a few. C. K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Pearson Prentice Hall,

2006.

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Demographical changes and improvements in the standard of living

With the impetus provided to industrial activity by measures initiated in 1991 budget, employment opportunities increased on exponential fold in urban centers resulting in ruralurban migration, which had a significant effect in bringing about demographic change in the country.83  Change in patterns of consumption and availability of low-cost consumer credit

With the objective of providing injections in the financial system, and to reduce leakages so as to provide impetus to private investment in the country, interest rates were decontrolled in a specific band, which resulted in easy access of credit to consumers, which in turn has led to spur growth in the financial system.84  Improvements in infrastructure and enhanced availability of retail space

Infrastructure was government‘s first priority, as in pre-liberalisation period there was dearth of investment in the same, so various initiatives were taken such as providing tax exemptions on infra-bonds, various models were developed like public private partnership (PPP Model), Build Operate Transfer (BOT Model), etc., to involve private sector in developing infrastructure of the country. Some of the prominent projects include Golden Quadrilateral (road sector), Ultra Mega Power Plant (Electricity generation), etc., were taken on the same lines and has resulted in spurring investment by retail players.  Entry to various sources of financing

Post liberalization there was huge influx of capital in the economy, so to regulate the same various legislations were passed and amended like Securities Exchange Board of India (SEBI, 1992) came into existence and since then there have been various financing models have been allowed like mutual funds, fund of funds, relaxation in external commercial borrowings
83

National Council Of Applied Economic Research, Delhi (NCAER), report on ‗The India Market Demographic Report Shivam Shirdhonkar, ―Analysis of Rural Retail Market for Aadhar‖, Available at

2002‘.
84

http://www.scribd.com/doc/50797888/20600169-godrej-Aadhar-Report, Last accessed on 14 October, 2012. .

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(ECBs), Indian Depository Receipt (IDR), etc., to enable private individuals to raise money in a proper legal framework. Various guidelines have been amended and have brought in transparency such as ICDR 2009 regulations, etc., which regulates the conduct of companies having securities listed in the capital market.85  Advent of information technology

Post 1990s, globe has witnessed astonishing development in the field of information technology due to heavy investment made in the sector during dot com bubble regime, resulting in advance technology being available at cheaper prices which has further come to as an aid to retail sector. Big corporations like Wal-Mart uses satellites, Radio Frequency Identification (RFID) system which has further increase the efficiency of the corporations, there by resulting in minimising costs.86 Impact of Organised Retail Worldwide on Macro Economy During recent decades, FDI has increased exponentially: the yearly global flows of FDI increased from 55 billion US $ in 1980 to 1,306 billion US $ in 2006. FDI inflows increased continuously during the 1980s and 1990s - with the sharpest growth in the late 1990s - to reach a peak in 2000. Between 2001 and 2003 the developed economies experienced a sharp decline in FDI inflows, associated with a general global economic recession. Developing countries were affected only to a small extent. FDI flows started to recover in 2004 and were back at their 2000 level in 2006.87

When a firm wants to invest in a foreign country, there are two possible entry modes, greenfield investment or M&A (mergers and acquisitions). Greenfield FDI refers to the establishment of new production facilities such as offices, buildings, plants, factories and the movement of intangible capital (mainly services) to a foreign country, one of the preliminary conditions laid down in DIPP notification. Greenfield FDI thus directly adds to production capacity in the host country and, other things remaining the same, contributes to capital formation and employment generation in the host
85 86

M.Y. Khan, Indian Financial System, Tata Mcgraw-Hill Education, New Delhi, 2011. Miguel Bustillo, ―Wal-Mart Radio Tags to Track Clothing‖, Wall Street Journal, 23 July 2010. UNCTAD Report on ‗Trade and Development 2007‘,

http://online.wsj.com/Article/Sb10001424052748704421304575383213061198090.html, Last accessed on 16 Oct. 2012.
87

Available at http://unctad.org/en/docs/tdr2007_en.pdf, Last accessed on 12 October, 2012.

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country. Cross-border M&As involve the partial or full takeover or the merging of the capital and assets of an existing enterprise in the host country by transnational companies from the home country. M&As represent a change in ownership that does not necessarily involve any immediate additions to investment or employment in the country.88 Greenfield investment is more important in developing countries than in industrialised economies. The main idea underlying the FDI liberalisation policies of many developing countries and the FDI promotion efforts of international donors such as the World Bank and the IMF is the notion that FDI inflows foster economic growth.89 As FDI is a composite bundle of capital stock, know-how and technology, its impact on economic growth is expected to be manifold.90

The traditional neo-classical approach to growth, this capital accumulation can affect growth only in the short run.91 Long-run growth is only possible through a permanent increase in the level of technology and is taken to be exogenous in neoclassical growth models.92 Yet, more recent models, i.e. the endogenous growth model, consider technology as internal to the economic growth process, and see a role for capital in the creation of technological advance.93 Capital allows for investment in the development of new ideas and skills, and since knowledge is - to some extent at least - a public good, it raises the level of technology not only within the firm but in the entire economy. 94 These externalities account for the permanent advance in the level of technology, which is needed to promote growth in the long run. Thus, according to the new growth theories capital - including FDI can permanently affect output growth through increased investment in technology and know-how,

88

UNCTAD Report on ‗Trade and Development 2006‘. Available at unctad.org/en/Docs/tdr2006_en.pdf, Last accessed J.H. Dunning, ―The Global Economy, Domestic Governance, Strategies Of Transnational Corporations: Interactions L. De Mello, ―Foreign Direct Investment in Developing Countries: A Selective Survey‖, The Journal Of Development R.M. Solow, ―A Contribution to the Theory of Economic Growth‖, Quarterly Journal of Economics, Vol. 70, 1956, pp. R.M. Solow, ―Technical Change and the Aggregate Production Function‖, Review of Economics and Statistics, Vol. 39, P. Romer, ―Endogenous Technological Change‖, The Journal of Political Economy, Vol. 98 No. 5, 1990, pp. 71-102. In later section China‘s and Brazil‘s home grown retailers have been discussed, how they survived competition from

on 10 October, 2012.
89

And Policy Implications‖, Transnational Corporations Journal, Vol. 1 No. 3, 1992, pp. 7-46.
90

Studies, Vol. 34 No. 1, 1997, pp. 1-34.
91

65-94.
92

1957, pp. 312-320.
93 94

foreign retailers and how they adopted practices followed by foreign retailers.

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thereby increasing the overall level of knowledge and technology in the economy. FDI is described as a whole package of resources: physical capital, modern technology and production techniques, managerial and marketing knowledge, entrepreneurial abilities and business practices.95 Therefore FDI is said to contribute directly - and more strongly than domestic investment - to accelerated levels of growth in an economy because of the more advanced levels of technology, managerial capacity and knowhow, resulting in higher levels of efficiency and productivity. MNCs are among the most technologically advanced firms and account for a substantial part of the world's investment in research and development .96 When starting up a foreign affiliate, MNCs are not likely to give the source of their competitive advantage away for free. They will thus try to limit horizontal spillovers (intra-industry) of productivity and market access advances to competing domestic firms that operate in the same market.97 Yet, technology and knowledge are characterised by imperfect markets with important externalities, so horizontal spillover of technology or trained labour to domestic competitors can never be completely prevented. In contrast, vertical spillovers (inter-industry) through forward and backward linkages with domestic companies are desirable for the MNC and it is thought that these spillovers to suppliers and buyers can play a very important role. While MNCs tend to prevent the transfer of technologies to home country competitors, they are likely to increase the efficiency of domestic suppliers or customers voluntarily through vertical input-output linkages.98 MNCs provide incentives to local firms by imposing high standards and help them to increase productivity and quality.99

Vertical spillover effects from FDI in the agri-food sectors of developing and transition countries have recently received a lot of attention as FDI in the agri-food sector of developing countries is thought to be particularly important because of the existence of vertical links with local farmers.
95 96

M.P. Todaro, The Economic Development in the Third World, Longman, New York, 1985. R. Caves, ―Multinational firms, Competition and Productivity in Host-Country Markets‖, Economica, Vol. 41 No. 6, Liesbeth Colen, Miet Maertens and Jo Swinnen, ―Foreign Direct Investment as an Engine for Economic Growth and

1974, pp. 176-793.
97

Human Development: A Review of the Arguments and Empirical Evidence‖, Human Rights and International Legal Discourse, Vol. 180, 2009.
98

H. Gorg and D. Greenaway, ―Much Ado about Nothing? Do Domestic Firms Really Benefit From Foreign Direct H. Gow and J. Swinnen, ―Up- And Downstream Restructuring, Foreign Direct Investment, And Hold-Up Problems in

Investment?‖, The World Bank Research Observer, Vol.19 No. 2, 171-197.
99

Agricultural Transition‖, European Review Of Agricultural Economics, Vol. 25 No. 3, 1998, pp. 331-350.

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Such vertical links in the agri-food sector entail the potential for creating poverty-reducing effects in the rural areas of developing countries, where poverty rates are often very high. Many studies provide evidence of positive productivity spillover effects from FDI in the agri-food sector to domestic farmers in low-income countries. Dairy farmers in Poland,100 have significantly higher levels of output and productivity when they are vertically linked to modern FDI milk companies, similar effects have been observed for the broiler, dairy and fruit and vegetable sectors in Thailand, the Philippines and Australia.101 These studies indicate that such productivity spillover effects are created because technology and know-how are transferred directly from FDI companies to supplying farms through contract-farming schemes, including extensive farm assistance programmes.

Empirical evidence of export spillover effects is limited but there is evidence of positive export spillover effects in the Venezuelan primary sector.102 The probability that a domestic firm engages in export activities is positively correlated with proximity to multinational firms, while for domestic exporting firms no export spillovers are found. MNCs' exports have a positive effect on domestic firms' probability of being exporters but do not find evidence that such spillovers impact on the export ratio of domestic firms.103

FDI can affect poverty is by contributing to the governments' tax revenue, which can be used for redistributive measures benefiting the poor or spent on the development of social safety nets for the poorest.104 In some developing countries, the importance of FDI in overall tax revenue is quite high, creating opportunities for poverty-reducing policy measures.105

100

L. Dries and J. Swinnen , ―Foreign Direct Investment, Vertical Integration And Local Suppliers: Evidence From The P.S. Birthal, P.K. Joshi and A. Gulati, ―Vertical Coordination In High-Value Food Commodities: Implications for B. Aitken, G. Hanson and A. Harrison, ―Spillovers, Foreign Investment and Export Behavior‖, Journal of D. Greenaway, N. Sousa and K. Wakelin, ―Do Domestic Firms Learn To Export From Multinationals?‖, European M. Klein, C. Aaron and B. Hadjimichael, ―Foreign Direct Investment and Poverty Reduction‖, World Bank Policy

Polish Dairy Sector‖, World Development Review, Vol. 32, 2004, pp. 1525-1544.
101

Smallholders‖, Mtid Discussion Paper No. 85, 2005.
102

International Economics, Vol. 43 No. 1-2, 1997, pp. 103-132.
103

Journal Of Political Economy, Vol. 20, 2004, pp. 1027-1043.
104

Research Working Paper, No. 2613, 2001.
105

50% of Botswana's Government Budget Results from foreign Inflows in the primary sector,. For Regular Updates, follow www.facebook.com/IPANglobal

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Indian scenario has been quite upbeat after the announcement of reforms as not only FIIs are on an investment spree but there has been major announcement with regards to FDI, very recent Swedish retailer IKEA, the world's largest furniture maker announced about € 1.5 Billion in India, over a certain period after having correspondence with Indian Commerce Minister Anand Sharma. 106 This step comes after India allowed up to 100% FDI in single brand retail, albeit company had some reservations as to the requirement of local sourcing. This investment does not look such a big step, but considering the fact that total investment/FDI received by India during April 2006 and March 2010 in single brand retails totals to around $ 194.6 million,107 the period in which 51% FDI was allowed certainly raises question as towards our FDI policy, if we are late entrant, further it also leaves a joyful question mark in our hearts, if the single brand retail is capable of attracting such a phenomenal investment then what would be the magnitude of investment by corporations dealing in multi-brand retail ?

Impact of Organised Retail on Micro Economy: Global Outlook  Impact on Retail Workers: Labour Law issues Merely bringing organised retail itself does not guarantee compliance of statutory laws, as one of the arguments government has voiced is that labour laws are not abided by unorganised sector. Experience of these large corporations tell us different story, as even in developed countries Wal-Mart has exploited lacunas present in the enforcement agencies. Wal-Mart pushes down pay/salary for retail employees even in the United States. When WalMart builds a new store there, the jobs that it displaces usually provided better pay, benefits and scheduling than Wal-Mart does.108 Workers are also less likely to have employersponsored health benefits, because they earn so little, Wal-Mart workers in the US are more likely to rely on publicly provided health and welfare programs compared to retail workers as a whole.109 In 2007, Wal-Mart was estimated to have lowered average retail wages by 10% –

106

Available

at,

http://www.Business-Standard.com/Results/News/Ikea-To-Enter-India-Invest-15-Bln-Euros-In-

Stores/175906/, Last accessed on 15 Oct. 2012.
107 108

Issue of Discussion Paper on FDI In Multi Brand Retailing,( Department if Industrial Policy and Promotion). Emek Basker , ―Job Creation Or Destruction? Labor-Market Effects Of Wal-Mart Expansion‖, J21University Of

Missouri, January 2004.
109

Affidavit of Kenneth Jacobs to the Competition Tribunal of South Africa, Ct Case No. 73/Lm/Nov10 For Regular Updates, follow www.facebook.com/IPANglobal

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by displacing higher-paying jobs and by putting pressure on competitors to reduce wages –at an annual cost to US workers of $4.5 billion.110

Treatment to fairer sex by Wal-Mart has also been subjected to criticism, as in 2010, WalMart employed 798,881 women at non-supervisory positions,111 who earned an average wage of just $8.81/hour,112 which is abysmally low in accordance to US standard of living wage for a single adult working full-time with a child.113

A lawsuit was instituted against the company alleging gender discrimination in pay and promotions which was tagged in a class action suit because of the extra ordinarily large number of people instituting similar proceedings.114 The lawsuit brought by Wal-Mart employees, Dukes v. Wal-Mart, became the largest class-action lawsuit in US history, with the plaintiffs representing around 1.5 million current and former female workers.115 As part of the proceedings, Wal-Mart was compelled to disclose payroll and employment records. In his analysis of these records, economist Richard Drogin found that in 2001, female employees at Wal-Mart at all levels earned less than their male counterparts.116 On average, women earned $5,200 less per year than men. The Dukes case was dismissed by the US Supreme Court in

110

Andrajit Dube, T. William Lester and Barry Eidlin, ―Firm Entry and Wages: Impact Of Wal-Mart Growth on Earnings Global Responsibility Report on ‗Social – Associates 2011‘. Available

throughout the Retail Sector,‖ Institute Of Industrial Relations Working Paper No. 126, 2004, p. 05.
111

Wal-Mart

at,

http://walmartstores.com/Sites/Responsibilityreport/2011/Social_Associates_Diversity.aspx, Last accessed on 16 Oct. 2012.
112

Gross,

Courtney,

―Is

Wal-Mart

Worse?‖,

Gotham

Gazette,

14

Feb.

2011.

Available

at,

http://www.gothamgazette.com/Article/Searchlight/20110214/203/3463, Last accessed on 14 Oct., 2012.
113

―Living Wage Calculator‖ Poverty in America, Available at http://www.Livingwage.Geog.Psu.Edu/States/08, Last Jeffrey Toobin, ―Betty Dukes V. Wal-Mart‖,

accessed on 16 October, 2012
114

The

New

Yorker,

20

June

2011.

Available

at:

http://www.newyorker.com/Online/ Blogs/Newsdesk/2011/06/Betty-Dukes-V-Walmart.Html,
115 116

Ibid. ‗Walmart‘s Global Track Record and the Implications for FDI in Multi-Brand Retail in India‘, UNI Global Union, at, http://www.uniglobalunion.org/Apps/Unipub.Nsf/Vwlkpbyid/870affcdcffa1ee

Available

7c12579c00054892d/$File/Fdi_Report.Pdf, Last accessed on 15 Oct. 2012.

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June 2011. The justices did not rule on the merits of the case; instead, they essentially decided to disallow the lawsuit because the class was so large. 117

Wal-Mart has broken the law multiple times in the past when it comes to minimum working conditions even in US where minimum wage and other basic labour standards exist but lacks strong enforcement.118 Wal-Mart recently in 2008, agreed to settle 63 pending wage lawsuits in 42 states. The settlements totalled $640 million dollars in legal fees and payments to former and current workers.119 Wal-Mart‘s record in case of compliance with child labour legislation is also poor as when it comes to workplace safety of the employed young persons. An internal company audit of 128 stores in the U.S. found that in one week in July 2000 there were 1,371 instances of minors working too late, during school hours, or for too many hours in a day. Wal-Mart paid $1,35,540 to settle a case with the U.S. Department of Labour alleging that the company violated child labour laws in the states of Arkansas, Connecticut and New Hampshire between 1998 and 2002 by requiring teenage employees to use hazardous equipment such as chain saws, paper balers and forklifts. 120 Washington State‘s Department of Labour and Industries in 2000, threatened to take over the management of Wal-Mart‘s workers‘ compensation claims as the Department found that Wal-Mart repeatedly was not allowing employees to file accident reports or workers‘ compensation claims, and further failed to respond to claims, made unreasonable delays in payments, prematurely terminated and miscalculated compensation, had consistently poor record-keeping, and failed to recognise injured workers‘ rights to lost-time compensation.121

117 118 119

Ibid. Kevin O‘grady, ―Five Decades After The Establishment of Wal-Mart‖, Business Day (South Africa), 12 May 2011. Steven Greenhouse and Stephanie Rosenbloom, ―Wal-Mart Settles 63 Lawsuits Over Wages‖, New York Times, 23 Steven Greenhouse, ―In House Audit says Wal-Mart Violated Labor Laws‖, New York Times, 13 January 2004. Affidavit of Annette Bernhardt in the Competition Tribunal of South Africa, Cc Case No: 2010 Nov 5445. For Regular Updates, follow www.facebook.com/IPANglobal

Dec 2008.
120 121

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Effect on local existing retailers and intermediaries Various studies have been conducted to study the impact of big corporations like Tesco and Wal-Mart on the scope of job creation by way of opening these big stores, it has been concluded that such stores in toto have negative impact, and one such studies explicit finding concludes that each Wal-Mart worker takes the place of 1.4 retail worker. 122

When modern retail arrived in Chile in 1990s, large number of small shops went out of business in the span of just a few years. It was reported in ICRIER‘s May 2008 report, that between 1991 and 1995, ―15,777 small shops went out of business, mainly in Santiago, a city of 4 million, ―representing 21-22% of small general food, meat and fish shops, 25% of deli/meat shops and dairy shops, and 17% in produce shops. 123 Chile‘s food retail sector has continued the process of consolidation to the point of negatively impacting free competition.

In December 2011, government competition authorities announced an investigation of Chile‘s highly concentrated grocery sector, where Wal-Mart is the largest player with 33.4% market share,124 for possible price collusion of basic products including meats and detergents.125 Chile‘s experiences with modern retail is no different than Argentina where from 1984 to 1993, during the most intense period of take-off of supermarkets, the number of small food shops declined from 209,000 to 145,000. 126

Another example from Latin America can be that of Mexico where the effects of global retailers on existing agricultural wholesalers is noteworthy, the role of regional wholesale
122

Neumark, David, Junfu Zhang, and Stephen Ciccarella, ―The Effects Of Wal-Mart On Local Labor Markets.‖ Iza Paper, January 2007. Available at: http://www.Newrules.Org/Sites/Newrules.Org/Files

Discussion

/Images/Neumarkstudy.pdf, Last accessed on 14 October, 2012.
123

Mahtew Joseph, Nirupama Soundararajan, Manisha Gupta and Sanghamitra Sahu, ―Impact Of Organized Retailing On ―Chile: Supermarket Sector Sending Out Sparks‖, Estrategia, 26 September 2011. ―Investigan En Chile a Principales Cadenas Supermercados Por Posible Colusión‖, Abc Digital, (2011) Available at,

The Unorganized Sector‖, Indian Council For Research On International Economic Relations, May 2008
124 125

http://www.Abc.Com.Py/Nota/Investigan-En-Chile-A-Principales-Cadenas- Supermercados-Por-Posible-Colusion/, Last accessed on 11October, 2012.
126

Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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markets diminished significantly due to ―the increasing reliance on direct procurement and distribution centres‖ as well as ―the emergence of large, powerful intermediaries closel y linked with state government and export markets.‖ Most notably, ―this sharp decline in sales coincides with the increasing market share of big retailers like Wal-Mart and national food retailers.‖127 Comparative Assessment of Organised Retail in Various Countries

CHINA
China ushered into an era of economic reforms, has emerged as an export juggernaut, and has experienced unprecedented urbanization which is backed up by the state‘s unswerving commitment to development which can be witnessed by high growth rate of GDP, have vaulted the Land of Dragon to a venerable position globally in terms of Purchasing Power Parity GDP, second only to the United States (U.S.). Over the past two decades China‘s Gross National Income (GNI) per capita has expanded 13 times. And as incomes have grown, so has the capacity to spend. 128 By 2015, per capita consumption in China is set to increase to 17,000 renminbi ($2502) from 13,400 renminbi ($1975) in 2008. Total urban consumption in 2015 is likely to exceed 13.3 trillion renminbi ($1.96 trillion), making the country the third biggest consumer market after the U.S. and Japan according to the 2009 Annual Chinese Consumer Study by McKinsey. These sweeping changes in China‘s socio-economic framework have also led to the emergence of a buoyant retail sector, which thrives on the progressive Chinese consumer. 129 With this, domestic retailers have come to benefit from the mounting retail appetite, and global retail chains have made a beeline to grab a share in the booming Chinese retail market.

As demand in the developed countries reaches maturity, the lure of the flourishing retail market in China has attracted global retailers since the floodgates of the sector were thrown open to foreign

127

James J. Biles and Et Al, ―Globalization of Food Retailing and Transformation of Supply Networks: Consequences for

Small-Scale Agricultural Producers In Southeastern Mexico‖, Journal Of Latin American Geography, Vol. 6 No. 2, 2007.
128

Available at, http://www.thomaswhite.Com/Explore-The-World/Bric-Spotlight/China-Retail.Aspx, Last accessed on

15 Oct. 2012.
129

Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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players.130 With consumption demand in most of the developed world still reeling under the aftermath of the global slump, the bustling Chinese retail market provides greener pastures for retailers looking for growth. Moreover, now that the Chinese government is consciously trying to retool its development model more towards domestic consumption rather than export dependence, retailing in the world‘s fastest growing economy is poised for exuberant growth. 131

China has experienced unparalleled levels of urbanization since the onset of economic reforms begun in 1978. Compared to 1980, today China‘s urban population has increased by over 200%. According to a McKinsey research study, by 2025, two thirds of the Chinese will be living in urban areas.132 By 2030, China‘s urban centers will be inhabited by 350 million more people, this increase itself beating the entire population of the U.S. today. Also by 2025, 221 Chinese cities will boast of a population of over one million, with 23 cities registering over five million. In comparison, Europe has just 35 cities with a population of over one million currently. 133 The urban economy is expected to generate 90% of China‘s GDP by 2025, with its aggregate consumption and disposable incomes twice those of Germany.

Opening up of retail sector: experience in China China‘s accession to the World Trade organization (WTO) in 2001 marked a new, liberalized era for foreign investment in retail. Under the WTO‘s Accession Protocol, the opening up of the retail sector was phased over a period of five years to December 2006. The framework of rules however, left much to be desired in terms of clarity and transparency.
134

On the issue of equal ownership between

the domestic retailer and the foreign investor, the Commercial Sector Measures brought out in April
130

Murali Patibandla, "Working Paper No. 336 Foreign Direct Investment in India's Retail Sector : Some issues", Indian ―Bric Spotlight Report on Retail Sector in China: The Next Big Thing?, 2011‖, Thomas White Global Investing,

Institue of Mangament, Bangalore, 2012.
131

Available at http://www.thomaswhite.com/pdf/bric-spotlight-report-china-retail-june-11.pdf, Last accessed on 12October, 2012.
132

Richard Dobbs, Sven Smit, Jaana Remes, James Manyika, Charles Roxburgh, Alejandra Restrepo, "Urban world:

Mapping the economic power of cities", 2011, Available at http://www.mckinsey.com /insights/mgi/research/urbanization /urban_world, Last accessed on 07October, 2012..
133 134

Ibid. Richard Self and B. K. Zutshi, ―Movement Of Natural Person Under The GATS‖, Joint WTO-World Bank

Symposium.

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2004 by the Chinese government were in contradiction with the Accession Protocol as well as the 2007 FDI Guidance Catalogue. While the Commercial Sector Measures restricted foreign investment to 49% equity for foreign-invested retail chains with more than 30 outlets, the Accession Protocol as well as the FDI Guidance Catalogue of 2007 allowed for equal ownership. However, providing some clarity, the Chinese government‘s Administrative Measures for Foreign Enterprises or Individuals Establishing Partnership Enterprises, brought out in 2009, now permits foreign investors or individuals to set up retail enterprises in partnership with domestic entities in China.135 The Chinese Ministry of Commerce has also been gradually delegating the authority to approve all foreign-invested retail businesses to provincial commerce branches, facilitating the expansion of foreign retail players within the country. China‘s retailing sector remains highly fragmented, housing many small and medium-sized retailers unlike the U.S. where the big retailers have a dominating presence. China was home to over 549,000 retail enterprises. Despite the fact that the number of chain stores has grown in recent years, cross-provincial retailers remain less common because of local market access barriers.

However, China does flaunt a wide array of retail formats, each at a different level of evolution and development: » » Department stores: These stores were popular earlier on, but are facing intense competition now and are battling to stay ahead. Hypermarkets: The development of hypermarkets has been led by international retailers, who are now spreading their wings to tier 2 and 3 cities, as markets in tier 1 cities reach saturation, retailers involved in the segment includes Wal-Mart, Carrefour, Vanguard, Tesco, Metro, RT Mart Shanghai, Trust-Mart, etc. » Supermarkets: This highly fragmented market dominated by domestic players, is witnessing cutthroat competition, often leading to weeding out of the weaker players coupled with strategic consolidation. » Franchising: Constituting about 3% of China‘s total retail market, franchising seems to have tremendous potential for future growth, existing players in the segment include KFC, McDonalds, 7-eleven and Pizza Hut.

135

Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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» » »

Specialty stores: Electronics/Appliances segment is dominated by domestic players, with limited foreign investment. Direct selling: With direct selling rules introduced in 2005, providing the much needed legal framework, the potential for further growth remains immense. Online retail: Online shoppers grew 68% between 2009 and 2010 to 185 million. Online retail sales have been predominantly consumer-to-consumer transactions. Some of the prominent retailers include Taobao, Alibaba and eBay.

Foreign companies were allowed to hold 51 per cent majority ownership (which India has now decided to grant them) only 12 years after the sector was opened, first allowing 26 per cent foreign equity. Initially, China also only allowed foreign retailers to open in select metropolises, such as Beijing, Shanghai and Shenzhen, and, moreover, only in certain districts in those cities. In Beijing and Shanghai, foreign retailers like Wal-Mart were only allowed to operate in districts where there were no local competitors. Through these „invisible barriers', China succeeded in giving local retailers protection, while, at the same time, they learnt from the ‗more efficient' business models of foreign companies.136 Opening up of sector in a phased manner has benefitted local retailers in terms of logistics, procurement and management, further benefits have also accrued to consumers as prices have fallen, and efficiency has increased.

BRAZIL
Situation in 1990s South American markets as a whole were characterized by economic instability attributed to high levels of public debt and hyperinflation was the hallmark of many Latin American economies. Inflation in Brazil had touched extreme high of 5000% in 1994.137 This resulted in buyers being forced to make stock as soon as they received salaries for fear of losing the real value of their money; retailers on the other hand too had to revise their price lists at short intervals.
136

Ananth Krishnan, ―Chinese Retailers Give Global Giants Run For Money‖, The Hindu, Dec. 2, 2011, Available at, BRIC Spotlight Report on, ‗Retail Sector in Brazil: Riding The Wave Of Middle Class Growth And Consumer Credit

http://www.Thehindu.Com/Business/Economy/Article2681679.Ece?Service=Mobile, Last accessed on 15 Oct 2012.
137

Boom 2012 ‘.

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IPAN Working Paper No.01/2012

With Cardoso, coming to centre stage Brazil‘s moved towards political and economic stability as various economic decisions were taken, such as Real Plan that introduced a new Brazilian currency which helped in reducing inflationary pressures over economy. The initiative unleashed a generation of consumers who witnessed their real salary being increased on account of low and confined inflation in the system. Again in 2003 there was a change in leadership and Lula Da Silva becoming head of the state who continued the reforms initiated by his predecessor and extended them to family welfare schemes, subsidized housing, an easier access to credit, and generous pay hikes, among other initiatives.138

Consumer lending was boosted as banks were allowed to deduct interest charges on debt directly from the workers‘ payroll. According to a study by Brazil‘s Getulio Vargas Foundation quoted in the Financial Times, about 49 million low-income Brazilians rose to the ranks of the middle and uppermiddle classes since 2003. Brazil‘s retail market is estimated to be worth about $230 billion, driven mostly by domestic demand. Besides the 40% growth in GDP per capita during the last eight years or so, population distribution also plays a vital role in encouraging the growth of sectors such as retail. 139 About 30% of the country‘s population lives in the 10 principal metropolitan cities. Sao Paulo brims over with a population of 18 million, while Rio de Janeiro has 10 million.140 As a PwC report points out, the lower income sections tend to spend more on essentials such as food and beverages, while those in the upper income bracket splurge on leisure, durable goods, as well as luxury items. 141 The Brazilian market is also perhaps the most internationalized among the BRICs, as the top 10 retailers corner almost 60% market share among themselves. Food retailers, apparel retailers, consumer goods makers, appliance retailers, and consumer staples companies form the backbone of the sector,

138 139

Ibid. Walter Molano, ―Latin America, Its Emerging Markets And The Global Economy - An Overview‖, The Journal Of

International Business & Law, Vol. 51, 2007.
140 141

Ibid. PWC Report on ‗Demographics and Consumer Behaviour: Brazil‘, Available at

http://www.pwc.Com/En_Gx/Gx/Retail-Consumer/Pdf/Brazil.Pdf, Last accessed on 15 Oct. 2012.

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supplemented by lesser savings rate existent in Brazil in comparison to its peers Brazil became a hot destination for investors.142

Opening up of sector: experience Although organized retail in Brazil could be traced back to 1948 when the current market leader Companhia Brasileira de Distribuicao (CBD), better known as Pao de Acucar, started off as a small bakery. Among foreign-owned entities, French retailer Carrefour S.A. was among the early birds to set up shop in Brazil, coming in as early as 1975. Walmart Brazil, the third in the pecking order, was established in 1995 but global biggies did not witness instant success rather homegrown retailers such as Hypermarcas and apparel retailer Lojas Renner S.A. have grew at faster rates, helped by their knowledge of the local market. Brazil has emerged as the world‘s third-biggest grocery market, next only to America and China, thanks to the aggressive growth strategy adopted by players operating in the market, both foreign and domestic.143 Global retailers such as Walmart and France‘s Carrefour bank on the Brazilian market to make up for sagging sales elsewhere. At the same time, domestic market leaders such as Pao de Acucar give them a run for their money. Still, the new entrants find it tough to gain a foothold in the highly competitive market, which offers great potential for growth.

Pao de Acucar is the biggest diversified retailer in Brazil, selling everything from groceries to home appliances to clothing. The company has a market share of about 18% which is more than any of the foreign retailer.

Carrefour S.A., French retailer, second only to Walmart worldwide, has been a significant market presence in Brazil for more than 25 years with a market share of about 14.5%. Carrefour has got support from locals as it became the first foreign retailer to source/procure Brazilian agriculture products to its store located across the globe.144

142 143 144

At, http://www.egmontinstitute.Be/Paperegm/Ep31.Pdf, Last accessed on 16 Oct 2012. Ibid.. Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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Wal-Mart the world‘s largest retailer though was a late entrant in Brazil retail space, its Brazilian unit is now one among its best performing subsidiaries.145 Last year, Wal-Mart Brazil, which has a market share of 12%, created ripples in the market when it implemented its ―Everyday Low Prices‖ strategy to take on its rivals. Though Wal-Mart Brazil first entered the market through a joint venture with local player Lojas Americanas, its growth has been driven by acquisitions of the local units of Netherlands‘ Royal Ahold and Portugal‘s Sonae.146 Many analysts are alarmed over Brazil‘s rapid credit growth, fearing that a U.S.-model credit bubble may be brewing. However, as a Financial Times report pointed out, this concern may be unfounded as about 60% of consumer loans are made against payrolls, property, or cars and are offered at fixed rates.

145

Alessandro Bonanno, Wal-Mart, ―Oligopsony Power and Entry: An Analysis Of Local Labor Markets‖, Aaea & Acci

Joint Annual Meeting In Milwaukee, Wi, July 26–28, 2009.
146

Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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PHILIPPINES
Several factors contribute to a growing middle class and rising consumer demand in the Philippines which was ranked 29th in 2012 Global Retail Development Index. Here salaries remain low, but household income is bolstered by overseas remittances that help maintain positive economic growth. Further new emerging sectors have also fueled the growth, like Business Processing Outsourcing in which it recently surpassed India resulting in increase of aggregate investment in the Country. 147 The bulk of income goes towards retail spending. The domestic job market is improving as the outsourcing industry grows, thus bringing more dual-income to middle class families and young professionals with disposable income to urban areas. Most of Philippines‘ retailers and shopping centers are in urban areas, with about half of total retail sales concentrated in the Manila area. Organised retail accounts for 35% of the total trade.148

Opening of the Economy Retail sector was opened to foreign investors in 2000 when Retail Trade Liberalization Act of 2000 (Retail Trade Act) was passed. This new act, which went into effect on March 26, 2000, essentially opened the retail sector to foreign ownership. The Retail Trade Act declared that ―the Philippine retail industry is hereby liberalized to encourage Filipino and foreign investors to forge an efficient and competitive retail sector in the interest of empowering the Filipino consumer through lower prices, higher quality of goods, better services, and wider choices.‖149 Under the Retail Trade Act, foreign ownership in the Philippine retail sector is contingent on the level of total paid-up capital of an enterprise, as specified under four categories. Category A consists of enterprises with less than US$2.5 million in paid-up capital, and is reserved exclusively for Filipinos and corporations wholly owned by Filipinos.150 Category B consists of enterprises with minimum paid-up capital of at least US$2.5 million and may be wholly-owned by foreigners after March 26, 2000, two years after the Act went into effect. During the first two years the Retail Trade Act was in effect, foreign ownership
147

Goutam Das and Sunny Sen, ―Born again India's BPO Industry Losing Voice, Finds Life Elsewhere‖, Business Today, UNCTAD Report on ‗Trade and Development Report 2012‘.

1 Apr. 2012.
148

Available at unctad.org/en/PublicationsLibrary/tdr2012_en.pdf, Last accessed on 05 October, 2012
149 150

Retail Trade Act, 2000 (Phil.), Available at http://www.chanrobles.Com/Republicactno8762.Htm. Ibid. For Regular Updates, follow www.facebook.com/IPANglobal

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was allowed up to only sixty percent.151 The third category, Category C, consists of enterprises with at least US$7.5 million in paid-up capital, and could be wholly-owned by foreigners immediately upon the Act's effective date." In addition, the Act requires that Category B and C enterprises with more than eighty percent foreign ownership offer a minimum of thirty percent of its equity on any Philippine stock exchange within eight years from the start of operations. The final category, Category D, includes those enterprises specializing in so-called high-end or luxury products, with a paid-up capital of at least US$250,000 per store. Category D enterprises can be wholly-owned by foreigners.152

Invisible Barriers Under the Retail Trade Act, a foreign retailer must demonstrate that its parent corporation had153: 1) a net worth of at least US$200 million for Category B and C enterprises, and US$50 million for Category D enterprises; 2) five retail branches or franchises anywhere in the world, unless it has at least one store with minimum capitalization of US$25 million; and 3) a five-year track record in retailing. Additionally, only foreign retailers formed or incorporated in countries that allow Filipino retailers are allowed to engage in retail trade in the Philippines. Finally, in order to promote locallymanufactured products, the Retail Trade Act required that, for the ten-year period beginning on March 26, 2000, Philippine-made products must make up thirty percent of the aggregate cost of a foreign retailer's inventory.

Effect on Infrastructure Economic indicators such as exports, imports, and employment in the country zoomed after liberalizing economy, further FDI made significant contribution to the country‘s development, its impact on technology transfer, productivity, domestic linkages, and employment are limited. The apparent lack of local suppliers and poor logistics and infrastructure had been the major impediments to FDI, but with gradual increase in investment there was creation of spillover effect by local

151 152 153

Retail Trade Act § 3. Ibid. Van V. Mejia,‖The Modern Foreign Investment Laws of the Philippines‖, Temple Int'l & Comp. L.J., Vol. 17 No. 2,

2003.

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suppliers on the rest of the economy.154 Moreover, poor logistics and infrastructure which limited FDI flows to industries with weak linkages with the rest of the economy has also been addressed, with investment in not limited to the retail sector, as with the development of the requisite infrastructure country also started attracting investments in outsourcing attributed to the presence of cost effective manpower.

154

Rafaelita M. Aldaba and Fernando T. Aldaba, ―Assessing the Spillover Effects of FDI to the Philippines‖, Discussion

Paper Series No. 2010-27.

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PART 4: POTENTIAL POSITIVE IMPACT OF INDIAN FDI IN RETAIL
Foreign direct investment plays an important role in India‘s growth dynamics. The examples are software and services industry, two-wheeler, automobile and auto-component industries, electronics and telecommunications155. FDI in these industries expanded domestic and export markets, benefitted consumers, generated employment, increased productivity and wages and generated externalities to local firms. FDI in the retail sector, supported by effective local institutions, might play similar role. The most important dimension of the possible benefits is generation of world class supply chain in India which might decrease transaction, information and production costs of business and expand markets significantly156. Change is essential part of any dynamic society. The role of the government is generating effective institutions that manage change which compensate the losers and make it work for the interests of larger sections157. The main role of government is to establish and implement effective and autonomous regulatory institutions - restraining anti-competitive conduct by firms, labour and environmental regulation158. The government has to make credible commitments of its policies. Agents react differently if they believe that the reform is only political window-dressing and most of it will be retracted in the face of opposition159. This behaviour has a significant effect on the success of the reforms and the time it takes for the reform process. If the government acts opportunistically in changing its policies, it sends signal of non-credible commitments which discourages investments especially in durable assets (with high fixed and sunk costs)160.
155 156 157

―Indian Retail Sector—An Outlook (2005-2010)‖, Research and Consultancy Outsourcing Services, 2004. M. Levy. and B. A. Weitz, Retailing Management, McGraw Hill Publishing Company Ltd, New York, 2003 S. Ganguly, ‗Retailing Industry in India‘, 2004,

Available at http://www .researchandmarkets.com/reportinfo.asp?report_id=307524, Last accessed on 12October,2012 at 1420 hrs
158

‗The

final

frontier

for

global

retailing

is

beginning

to

open‘,

2006,

Available

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http://www.indiaonestop.com/retailing.htm , Last accessed on 11October,2012 at 1740 hrs.
159

"Coming to market", 2006, Available at http://www.economist.com/node/6795668?story_id=6795668, Last accessed N.K. Malhotra, Marketing Research – An applied Orientation, Dorling Kindersely India, New Delhi, 2011. For Regular Updates, follow www.facebook.com/IPANglobal

on 04 October, 2012.
160

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Huge investments in the retail sector will see gainful employment opportunities in agroprocessing, sorting, marketing, logistics, and front-end retail. At least 10 million jobs are likely to be created in the next three years in the retail sector161. FDI in retail will help farmers to secure remunerative prices by eliminating exploitative middlemen. Foreign retail majors will ensure supply chain efficiencies162. Policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is expected to considerably reduce post-harvest losses. There has been impressive growth in retail and wholesale trade after China approved 100% FDI in retail163. Thailand has experienced tremendous growth in the agro-processing industry. In Indonesia, even after several years of emergence of supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers164. In any case, organized retail through Indian ownership permissible. Experience of the last decade shows small retailers have flourished in harmony with large outlets165.  Macro economic impact 1. Presence of Strong FDI A strong FDI presence in retail sector is expected to not only boost the retail scenario, but also act as a driving force in attracting FDI in upstream activities as well 166. This will be more

161

‗Innovation

is

key

to

sustain

growth

in

FMCG

sector‘,

2005,

Available

at

http://www.indiainfoline.com/news/news.asp?dat=72291, Last accessed on 12October,2012 at 0910 hrs.
162

‗The Retail Industry‘, 2007, Available at http://www.ibef.org/industry/retail.aspx , Last visted on 10October,2012 at David Barstow, ‗Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top Level Struggle‘, The New York Times, E. Basker ‗Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion‘, The Review of Economics and Amitabh Mall, Kanika Sanghi, Abheek Singhi and Arvind Subramanian, The Tiger Roars: Capturing India‟s H Brea-Solis, Ramon Casadesus-Masanell and Emili Grifell-Tatje, 2010,„Business Model Evaluation: Quantifying Sources of Advantage‟, Available at http://www.webmeets.com Last accessed on

1120 hrs.
163

21 April, 2012.
164

Statistics, Vol. 87 Issue 1, 2005, p. 174-83.
165

Explosive Growth in Consumer Spending, Boston Consulting, New Delhi, 2012.
166

Walmart‟s

/files/papers/SAEE/2010/461/Quantifying%20Walmart%20Sources%20of%20Advantage.pdf, 11October,2012

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prominent in food processing and packaging industries because many large retail chains also promote their own brands by way of backward integration/contract manufacturing 167. i. Generation of Employment The outcome of FDI in retail is noteworthy in terms of the benefits to the customer, the generation of employment and the ability of more people generation X marketing168. ii. Indian Retail Sector According to the market research report, ―Indian Retail Sector- An Outlook‖ (20052010) prepared by RNCOS it is found that if the government allowed 26% of FDI into retail, the sector would grow at an AAGR of 28%-32% much more than current Rs 27,000cr169. iii. Unreasonable apprehension If one looks at the experience of countries like China & the US, one gets a feeling that the apprehensions of the left parties as well as the local retailers are misplaced170. iv. Situation in United States of America In America, which is by far the most matured retail market in the world, 95% of retailers are store operations. Now they may not be as small as our grocery shops, but are still small when looked at from the US perspective 171. Some of the world‘s largest retailers, like Wal-Mart, JC Penny, Target, etc. are American. Notwithstanding the dominance by these large players, the smaller ‗mom n pop‘ stores still co-exist with them, though one may not find them in the same vicinity as the big retailers. And,

167 168 169

PM Chandran, Wal-Mart‟s Supply Chain Management Practices, ICFAI ICMR Case Collection, 2003 Pankaj Ghemawat, Redefining Global Strategy, Harvard Business School Press, Cambridge, 2007. N. Lichtenstein, ‗Wal-Mart: Template for 21st Century Capitalism‘, New Labor Forum, Volume. 14 Issue1, , 2005, p. Murali Patibandla, ‗Pattern of Foreign Direct Investment in Developing Economies: A Comparative Analysis of China Price Water Cooper (2011): ‗Winning in India‘s Retail Sector: Factors for Success‘, Available at

21-30.
170

and India‘, International Journal of Management and Decision Making, Volume 8 Issue 2-4, 2007, p. 356-77.
171

https://list2.pwc.fr/assets/files/lettre_retail-and-consumer/pwc_winning_in_india_retail _sector_1.pdf, Last accessed on 05 October, 2012.

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even though their market share is getting eroded slowly, they still account for just under 50% of the total American retail trade 172. v. Situation in China Similarly in China, the top 10 retailers (both domestic & International), had only 9.6% share of the $628-bn retail market in 2004. This was up from 2.9% in 2000 173. vi. The Kirana Store Position The Kirana store owners in India face a threat from the domestic players, who have aggressive expansion plans for the future. In addition, few of the country‘s large corporate houses like Reliance, the Tatas and the Munjals, etc. too have mega plans for the retail sector174. In fact Reliance has announced one. So, the grocery shopkeepers will feel the heat from these companies in any case, which is a point the communists ally of the Government fail to appreciate 175. Even in China, where FDI in retail was allowed long time back, small vendors of vegetables and fruits coexist with the hundreds of superstores, who are perceived to be the biggest threat to the Kirana shops176. Even in India, where organized retailers have started mushrooming in big cities, the grocery shop owners have not been wiped out 177.

172 173

P. Ghemawat and Ken A. Mark, ‗The Real Wal-Mart Effect‘, Harvard Business School Working Knowledge, 2006. A. Ray, B. Das, B. Baral, J. Rico and R.S. Pramanik, FDI in Multi-Brand Retail in India, Indian Institute of S. Robinson, ‗Food Fight‘, 2007, Available at http://www.time.com/time/magazine/article/0 9171,1626725,00.html, O Schell, ‗How Walmart Is Changing China‘, 2011, Available Last accessed at on

Management, Bangalore, 2012.
174

Last accessed on 13October,2012 at 0950 hrs.
175

http://www.theatlantic.com/magazine/archive/2011/12/how-walmart-is-changing-china/308709/#, 12October,2012 at 0520 hrs.
176

Narayan Basu, ‗Big Retailers not to effect mom ‗n‘ pop store: ICREIR‘, Financial Chronicle, May 27, 2008,

Bangalore.
177

Murali Patibandla, Evolution of Markets and Institutions: A Study of an Emerging Economy, Routledge Taylor and

Francis, New York, 2006.

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vii. Exposure to Global Supply Chain Though one may argue that the supply chain efficiency can also be brought in by the local retailers too, the moot point is that the global giants like Wal-Mart can substantially improve the fortunes of India‘s farm sector by directly linking it with global supply chain178. Remember, China‘s agriculture exports to the US nearly trebled from $3.86bn in 1999 to $9.96bn last year. India, on the other hand has made only a marginal progress, with its farm exports to America rising from $3.19bn in 1999 to just $4.28bn 179. viii. Draft ICRIER Report, 2004 A draft ICRIER report released in November 2004 called for 49% FDI in retail and opening up of the sector in a phased manner over a period of five years. Fears about large-scale loss of jobs in the unorganized retail sector due to inflow of FDI was unfounded, said the study. Job creation in the organized sector would more than compensate for loss of jobs, and consolidation in the retail sector would also push up economic growth. The report said that allowing foreign investment in retail would lead to inflow of technical know-how, encourage large-scale production, increase employment and investments and strengthen India‘s position as a sourcing hub. Domestic companies would be able to compete on a stronger footing in the international market on the strength of the experience gained from working and competing with multinationals180. ix. Generation of Employment The retail sector can generate huge employment opportunities, and can lead to job-led economic growth. In most major economies, ‗services‘ form the largest sector for creating employment181. US alone have over 12% of its employable workforce engaged in the retail sector. The retail sector in India employs nearly 21 million people, accounting for roughly 6.7% of the total employment. However, employment in organized retailing is still very low, because of the small share of organized retail business in the total Indian retail trade. A
178 179

Arjun Swamp, "India's Retail Revolution", Blog Global Economy, March, 2007. Singh Sukhpal, ‗Spencer‘s Retail‘, in M Harper, Inclusive Value Chains: A Pathway out of Poverty, World Scientific, Bijoor Harish, ‗The Sin of Retail‘, Business Line,, 2008, Last Available accessed at on

Singapore, 2010, 81-93.
180

http://www.thehindubusinessline.in/catalyst/2008/06/12/stories/2008061250170400.htm, 14October,2012 at 1540 hrs.
181

V.Namakumari Ramaswamy. , Marketing Management Global Perspective Indian Context, Macmillan Publishers

India, New Delhi, 2009.

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modern retail sector has the potential of creating over 2 million new jobs within the next 6 years in the country (assuming only 8-10% share of organized retailing), according to Arvind Singhal, CMD, KSA Technopak India Ltd182. A strong retail front-end can also provide the necessary fillip to agriculture & food processing, handicrafts, and small and medium manufacturing enterprises, creating millions of new jobs indirectly183. Through its strong linkages with sectors like tourism and hospitality, retail has the potential of creating jobs in these sectors also184. x. Planning Commission‟s Views Though the Planning Commission has identified retail as a prospective employment generator, in order to strengthen the multiplier effect of the growth in organized retailing upon the overall employment situation, a pro-active governmental support mechanism needs to evolve for nurturing the sector185. Issues like FDI in retail, allocation of governmentcontrolled land on more favourable terms, strong political and bureaucratic leadership, etc., need to be addressed adequately186. xi. FICCI Views Mr. Ravi Raheja, Chairman, FICCI Retailing Committee, while underlining the need for FDI in the sector pointed out that foreign investment would generate competition and not adversely affect the small retailers187. Ultimately, the consumers would stand to benefit in terms of a wide range of products of world-class quality and lower prices. xii. Inflation Control 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 prices188. World Bank attributes the opening of the retail
182 183 184

Rosemary Varely and Mohammed Rafiq, Principles of Retail Management, Palgrave, London, 2003 Sandeep R.S.Roy, Opportunity in Indian Retail Macmillan, New Delhi . Patibandla Murali ()‗Structure, Organizational Behavior and Technical Efficiency‘, Journal of Economic Behavior and

Organization, Vol.34, Issue3),p. 431-42.
185 186 187

Department of Economics and Statistics, Statistical Outline of India2002-03, Tata Service Limited, New Delhi, 2004 Swapana Pradhan , Retailing Management: Text & Cases, Tata Mcgraw Hill Publishing Limted, New Delhi, 2009n. S.R. Subba Rao, ―Organised Retail Sector in India: Growth and Impact on the Economy‖, The Journal Of Indian

Management and Strategy, Vol. II, No.2 April – June ,2006.
188

Julia Hanna, Ground floor opportunities for retail in India, 2004, Available at www.hbswk.hbs.edu, Last accessed on

14October,2012 at 1740 hrs.

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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.  Impact Upon Local Dealers In Unorganised Retail – Negligible Or Substantial? i. Situation of Mom-and-Pop stores 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. 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. ii. Reliability and Profitability of Markets 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 189. iii. Inflow of Real Competition in the Market By allowing 51% foreign investments in the Indian market, it will teach the local retailers about real competition and help in insuring that they give better service to Indian consumers. It is obviously good for local competition. The kirana stores operate in a different environment catering to a certain set of customers and they will continue to find new ways to retain them. iv. Retention of domains by smaller traders In the Indian policy debate, a contrasting view is that growth in organized retail is expected to benefit producers, without (significantly) hurting smaller traders and that

189

Patibandla Murali and Bent Petersen, `Role of Transnational Corporations in the Evolution of a High-Tech Industry:

the Case of India‘s Software Industry- A Reply‘, World Development, Vol. 32 Issue 3, 2004, pp. 561-66.

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they may preserve their smaller domains without being swallowed up by large retailers190.  i.

Impact upon Agriculture The vicious circle of poverty for farmers As long as the foreign players such as Wal-Mart do pricing based on long run average costs, the benefits will accrue to consumers and farmers. Small and medium farmers are trapped into a vicious circle of poverty because of inefficient input and output markets especially distress sales at the time of harvest owing to underdeveloped agricultural supply chain in India. Since the independence of India, India‘s government systematically failed in solving this vicious circle. As a matter of fact, it made it worse by bad economic policies. A simple example is banning of cotton exports and causing suicides of farmers because the mill sector is better organized than small farmers in capturing the government policies191. Another example is interstate barriers of agricultural trade which depresses prices in the regions which are productive which means punishing the farmers who are productive.

ii.

Better infrastructure Facilitating the Indian and foreign players to generate the supply chain infrastructure, farmers can be made to be better off. The growth dynamics of generation of efficient supply chain are that it increases farmers‘ surplus and agricultural productivity which releases people from agriculture that have to be absorbed by the manufacturing. The supply chain will also result in the growth of manufacturing (home and export market expansion) which would absorb the people released from agriculture provided that the agricultural workers are imparted with basic literacy skills.

iii.

Elimination of middlemen The main losers would be the middlemen rather than small traders. Small traders retain the advantage of low overhead costs and take advantage of geographic distribution and density of consumers. Any technological and organizational changes have disruptive effects - some losers in the short run and larger number of gainers in

190

Arpita Mukherjee & Nitisha Patel ,FDI in Retail Sector: India , Academic Foundation in association with ICRIER and ―R-day reforms: Single brand retail opened to foreign funds‖, Indian Express, January 25 2006. For Regular Updates, follow www.facebook.com/IPANglobal

Ministry of Consumer Affairs, Food and Public Distribution(Govt. of India), New Delhi, 2005..
191

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the long run. As the presence of large retailers increases, government tax revenues will increase which can be used to compensate the losers. It is unlikely that centuries old entrepreneurial dynamism of India‘s bazaars will be seriously dented by the advent of large retail firms in India192. The farmers will benefit from FDI as they will be able to get better prices for their produce. The elimination of the intermediate channels in the procurement process will lead to reduction of prices for consumers193. iv. Backward linkages with agriculture sector Those who are against FDI in retail are also missing an even bigger point. It concerns with the backward linkages with the agriculture sector, efficiency in supply chain that foreign retailers can bring and the huge opportunity in farm exports. India can attain huge savings by merely improving the supply chain. Some 20-40% of all fruits & vegetables grown in the country go waste due to poor transportation, storage and handling infrastructure. Also, for every rupee that an Indian consumer spends, the farmer gets only 20-22 paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly source through farmers, consumers will have to pay less and the retailers will get higher margins.  Impact upon demand-supply gap: i. Entry of foreign retailers In political economy terms, the entry of foreign retailers affects different stakeholders on the demand and supply side. Improvement in supply chain, especially for food items, across the country benefits low income groups because their major part of the consumption basket is food. ii. Increase of supply to small and medium farmers Secondly, it will increase surplus to small and medium farmers. Low income consumers on the demand side and small and medium scale farmers on supply side are less cohesively organized in influencing government policies than wholesalers, middlemen, and Indian large retailers. Indian large retailers (such as the newly entrenched interests like the Reliance fresh) may block the entry of foreign players
192

Patibandla Murali and Trilochan Sastry ‗Capitalism and Cooperation: Cooperative Institutions in a Developing

Economy‘, Economic and Political Weekly, Vol. XXXIX Issue27, 2004, pp. 2997-3004.
193

Arpita Mukherjee, "Working Paper No. 80, Distribution Services: India And The Gats 2000 Negotiations", Indian

Council For Research On International Economic Relations, 2002.

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with short-term calculations of their interests. However, they can benefit from externalities arising out of the entry of foreign players if the foreign players invest significant resources in developing the supply chain and improve the know-how of large number of vendors. This took place in the case of the automobile sector. Apart from this, some of the wholesalers and small Kirana stores adopted innovative practices in procuring and selling goods in response to competition from the large retailers which will improve the overall organization of the markets194.  Impact in terms of better availability to consumers i. Availability of better technology 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 retailing195. Entry of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the prices196. ii. Lowering of prices 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 advantage197. iii. Access to larger financial resources 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
194

Patibandla Murali and Bent Petersen, ‗Role of Transnational Corporations in the Evolution of a High-Tech Industry: M. Rehman, , ‗Impact of FDI in Retail in India‘ 2006, Retrieved, from http://ezinearticles.com/?Impact-of-FDI-in-

the Case of India‘s Software Industry‘, World Development, Vol. 30 Issue 9, 2002, 1561-77.
195

Retail-in-India&id=380228, Last accessed on 04 Ocxtober, 2012.
196

Michel Chossudovsky, The Globalisation of Poverty: Impacts of IMF and World Bank Reforms, Zed Books Limited, Murali Patibandla, Deepak Kapur and Bent Petersen : ‗Import Substitution with Free Trade: The Case of India‘s

London, 1997.
197

Software Industry‘, Economic and Political Weekly, 8 April, 2000, pp. 1263-70.

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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. FDI in retailing can easily assure the quality of product, better shopping experience and customer services.  Others i. Development of supply chains 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 management198. ii. Presence of joint ventures Joint ventures would ease capital constraints of existing organized retailers. FDI would lead to development of different retail formats and modernization of the sector199. FDI would lead to expansion of opposite sell formats as good as modernization of a sector200. iii. Potential of Retail Sector 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 marketentry announcement from some retailers and has signalled to international retailers about India‗s seriousness in promoting the sector201. iv. Suitability of India

198

A. Mukherjee, & N. Patel, , FDI in Retail Sector: India, Academic Foundation in association with ICRIER and

Ministry of Consumer Affairs, Food and Public Distribution(Govt. of India), New Delhi, 2008
199

United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Transnational Corporations and ‗Forms of Foreign Capital Flowing into India‘, Available at http://business.mapsofindia.com/fipb/forms-foreign-

Primary Commodity Exports from Asia and the Pacific, Bangkok, 1981.
200

capital-flowing.html, Last accessed on 10 October, 2012
201

Global Economic Prospects and the Developing Countries, World Bank, New York, 1994, p. 41. For Regular Updates, follow www.facebook.com/IPANglobal

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

v.

Social agenda Allowing FDI in multi-brand retail can give a big push to the country‗s social agenda, too, and has the potential to even positively impact and promote tourism, computerisation, systemisation, government‗s 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. Also, the retail revolution can change country‗s perception across the globe, integrating it seamlessly into world trade and economy.

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PART 5: POTENTIAL NEGATIVE IMPACT OF INDIAN RETAIL FDI
It is believed that this move will lead to large scale loss of self-employment because of intense competition heat for unorganized retailers. International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the USA, and in Europe. South East Asian Countries had to impose stringent zoning and licensing regulations to restrict growth of supermarkets because small retailers were getting displaced.

India has the highest shopping density in the world with 11 shops per 1000 people. It has 1.2 crore shops employing over 4 crore people; 95% of these are small shops run by selfemployed people202. Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign players. Fragmented markets give larger options to consumers203. Consolidated markets make the consumer captive. Permitting the foreign players with deep pockets will lead to consolidation. International retail does not create additional retail markets, it merely displaces existing markets. Jobs in the manufacturing sector will be lost because structured international retail makes purchases internationally and not from domestic sources.

Political control by pumping in enormous FDI into the country will lead to re-colonization that we had during the pre-independence period. The indigenous trading community will be adversely affected. This will be nothing but an enactment what this country had already experienced during the alien rule. Control of manufacturing sector and biasing the production of goods will also enable pricing policy that will be decided by the marketers.

There will be destruction of cottage industries as they will have no appreciable marketing strategies or powerful retail outlets. A purchase phobia will be created in the minds of middle class people and make them credit dependent and thus trying to push them in debt trap. Entry

202

ICICI Property Services-Technopak, ―India Retail Real Estate: The Read Ahead‖, ICICI Property Services Technopak Mandeep Singh, ―Globalization in retailing; Causes, Impact and Trends in India", National Seminar On Foreign Direct

White Paper, 2007-08.
203

Investment in Retail Business, Feb. 18, 2006 in Guru Nanak Khalsa College, Karnal.

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of foreign and enemy agents inside India in the garbs of merchants will result in destabilizing the security of the country. The hypermarket concept will further increase the gap between haves and have not. Thus the formation of an egalitarian society will only be a dream. The aggression of the developed countries against the underdeveloped or poor countries will be more pronounced. The developed countries with a better economy will register for all patents and rights in the international market and make the ill equipped and poor countries fully dependent on them. The wealth of the country is likely to be siphoned off to alien countries without our knowledge or by circuitous means.  Macro Economic impact i. Per capital income India's per capita income is now $800204. This is per capita income through the Atlas method, using official exchange rates for conversion. It is not per capita income using purchasing power parity, which adjusts exchange rates for purchasing power of currencies205. From the World Development Indicators database, we know India's PPP per capita income was $3,100 in 2004, leading to a rank of 145th out of 208 countries ranked206. ii. Purchasing Power Parity Understandably, PPP blows up incomes of developing countries, in relative terms. If we find a compromise in per capita income, we may assume it nearer to $1000207. However, about 30% of the population in India is below poverty line and they cannot afford to have even one square meal a day. The concepts of FDI or Hypermarkets are

204

R. Banga, "Working Paper No. 154, Trade and Foreign Direct Investment in Services : A Review‖ Indian Council For

Research on International Economic Relations, 2005. Available at http:\\www.icrier.res.in/wp154.pdf, Last accessed on 14 October, 2012.
205

E. Basker, . "Working Paper No. 0215 Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion‖,

Department of Economics, University of Missouri,2004.
206

B. Carver, , C. He and J. Hister, "India's Textile Industry : What will Happen When the Quotas are Lifted ?" Final S. Daunfeldt, ., Niklas Rudholm and Fredrick Bergstrom . ―Umea Economic Studies No. 599, Entry into Swedish

project presented at GTTL Conference on June 2, 2004 at the University of Washington.
207

Retail and Wholesale Trade Market‖, Department of Economics, Umea University, 2002..

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beyond their reach. Instead, this phenomenon will bring in spiralling effect on prices of consumer goods due to which the population below poverty line may increase208.  Micro economic impact i. Economies of Scale The global players have economies of scale and are perfect in cost cutting and providing the consumer the best at lowest price which still is a major challenge for Indian retail firms. The way they perform their process itself builds an entry barrier for other new firms209. ii. Brand name They bring with them world class products which have high quality and a highly valued brand name. The domestic brands don‘t have that charm and attracting power as of global brands210. iii. Technology Global players are highly advanced in technology. The tools, equipments, kind of warehouses they use, their way of performing processes are highly advanced and cannot be compared with those used by Indian retail firms, which in turn provides better services and better quality products even in categories like perishable food etc. iv. Attract skilled employees The work culture of global players is quite different from those of Indian players. They believe in earning profits by cutting costs as much as possible and at the same time are conscious towards career of their employees211. Their approach is more oriented towards achieving ends rather than means. Attractive salary and high incentives can also attract skilled employees towards global players which is also a threat for big Indian retail firms. v.
208

Better infrastructure

M. Bertrand, and Francies Kramarz, " IZA Discussion Paper No. 415, Does Entry Regulation Hinder Job Creation ?

Evidence from the French Retail Industry", Institute for the Study of Labor.(IZA), 2002
209

P.S. Birthal, ., P.K. Joshi, and A. Gulati, Vertical coordination in high value commodities. In From plate to plough:

Agricultural diversification and its implications for the smallholders in India. Submitted to Ford Foundation, New Delhi, by International Food Policy Research Institute, Washington DC, 2006.
210 211

A. Desai, . The Price of Onions, Penguin Books, New Delhi,1999 Dabra Johnson, Book. Review of "Investment Analysis in Emerging Markets", Transnational Corporations, Vol. 14,

No. 2, Aug. 2005.

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Better storage facilities, better transportation medium and high investment can pose another threat to Indian retail firms which can hardly match the capabilities of giants on their own212. vi. Joint ventures Global players may not prefer to enter into joint ventures with Indian firms and may also close down the existing ventures in wholesale and single brand which may adversely affect the Indian firms. This is possible when 100% FDI is allowed in multi-brand retail.  Loss of jobs from unorganised retail i. Unfair Competition Opening up FDI may lead to unfair competition and ultimately result in large-scale exit of incumbent domestic retailers, especially the small family-owned business. Given the large unorganized component of the retail sector, this is a major concern 213. Small shops in Mumbai are adversely affected, in terms of falling sales, by the growing influence of shopping malls in the city. If employment too is adversely affected, it is not clear how organized retail may absorb this displaced labour214. ii. Kirana Stores The main fear is that the ingress of MNC Giants like Wa1mart, Tesco and Carrefour will throw the hundreds of thousands of the neighbourhood Kirana store owners out of business, leading to millions of job losses215.

212

D. Farrell, . "The Case for Globalisation : The Results of McKinsey's Latest Study of the Pros and Cons of Emerging Foreign Investment," The International Economy, Winter Issue, 2004 Available at

Market
213

http:\\www.findarticles.com/p/articles/mi m2633/is 118 / ai 113564062, Last accessed on 04 October, 2012 A. Knorr, and A Arndt. "Why did Wal-Mart fail in Germany?" Paper presented at the Hawaji International Conference

on Business, June 18-21, 2003.A.Mukherjee, "ICRIER Working Paper No. 80, Distribution Services: India and the GATS 2000 Negotiations, ", 2002.
214

T. Reardon,, C.P. Timmer, C.B. Barrett and J.A. Berdegue "The Rise of Supermarkets in Africa, Asia and Latin

America," American Journal of Agricultural Economics, Vol. 85, No. 5, pp. 1140-1146, December 2003.
215

W.G. Saab, W.G. and Luiz Carlos Perez Gimenez ,"Current Aspects of Food Retailing within Brazil and at Level," The Brazilian Development Bank, 2000, Available at http://www.bndes.gov.br/

International

english/studies/studies02.pdf, Last accessed on 6 October, 2012.

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iii.

Unorganised retail sector It may be estimated that about 5 crores of population are employed at present on unorganized retail sector and this population will be hit badly if the mall system is introduced. This will again add unemployment problem to the common labour market216.

iv.

Agricultural aspect The agricultural employees are part timers in the system of rural marketing and their case will become worse and they will go jobless for about 6 months period in a year during which they practice marketing their agricultural products217.

v.

Negative impact of loss of intermediaries Also, by reducing the number of intermediaries, organized retailing will lead to some job displacement218.

vi.

Literacy It is said that FDI would provide employment opportunities. But, the fact is that they cannot provide employment opportunities to semi-illiterate people219. 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 number220.

 Predatory pricing leading to losses to SMEs and Small Scale Industry i. Domestic players Another concern is with regard to the pricing power of the global retail giants which the communists say will squeeze out the suppliers and hurt farmers. The left are also worried that the foreign retail majors will hurt domestic players with the practice of predatory pricing and become monopolies.

216

Vedpuriswar, A.V., (2001). "The Globalisation of the Retailing Industry," Chapter from the Book - The Global CEO,

ICFAI Website: http://www.vedpuriswar.org/book/bookoverview.
217

N. Wrigley, and A. Currah "Globalizing Retail and the E-conomy: The Organizational Challenge of E-Commerce for

the Retail TNCs, "International Review of Retail and Distribution Management, 2003
218

Philip Kotler and Kevis Lan Kelles, "Managing Retailing, Wholesaling and Logistics" Marketing Management, D. Dutt,, ‗An outlook for Retailing in India, Vision2005‘ (Form a presentation by KSA Technopak at MDI Gurgaon

Pearson Prentic Hall, Delhi, 2006.
219

in January and February, 2004).
220

Philip Kotler, Marketing Management,., Prentice Hall of India Pvt Ltd, New Delhi, 2000 For Regular Updates, follow www.facebook.com/IPANglobal

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ii.

Monopoly position Due to financial clout of the global retailers, 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 profits221.

iii.

Hyper marketing and super marketing There are about one crore small time traders whose investments are within the range of a few thousands to one crore. These traders are having a base in urban, semi urban and in rural areas. The hyper marketing and super marketing concepts will kill them, as they cannot afford to compete with the giants as far as their marketing presentation, product delivery and pricing domination. Once such an unequal war is fought against the parties, the destruction of the small traders is certain222. Pepsi – Cola – Parle Case The best example is the war that was fought between the indigenous soft drinks manufacturers and the international giants Pepsi and Coke. Both the erstwhile Janatha Government drove out the companies Pepsi and Coca Cola in 1977-78 that re-entered in India during 1989-90. During the re-entry stage, the giants found that comfortable market was enjoyed by the indigenous manufacturers such as Parle etc. The Pepsi and Coke found that the pricing strategy will give a blow to the Indian software marketers and they started to sell 250/300 ml bottles at the price of Rs.5/- whereas the Indian marketers were selling 200 ml at the cost of Rs.6/-. This aggravated their markets and the hot and chirpy taste of the foreign giants made a trick in the psyche of the consumers. The tingly taste was liked along with a lowered price for the commodity and that was the death bell for the local manufacturers. The Pepsi and Coke amalgamated or purchased all the Indian manufacturing companies along with their bottling units and converted them as its own marketing and manufacturing points.

iv.

v.

Higher lending rates 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

221 222

P. Powers,. "Distribution in China: The End of the Beginning, "The China Business Review, July-August 2001. Madona Devasahayam, , ‗Big Deal‘, Praxis Quarterly Journal on Management, August, Vol.2, No.2., 1998 For Regular Updates, follow www.facebook.com/IPANglobal

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cost of borrowing forces the domestic players to charge higher prices for the products223.  Cooperative Movement v. Foreign funded organised retail i. Retailers‟ Cooperatives There is a need for setting up of Retailers Cooperatives which functions as distribution centres and warehouses. It will help the retailers to buy the products they want directly from original manufacturers in bulk quantity. ii. Definition of Cooperative Stores Cooperative stores in India are the result of the cooperative movement that can be traced to the Pre-independence period. They emerged as a reaction to the feudal system & attempted to place the fruit of labour in the hands of the producer himself to make himself relevant. A consumer cooperative is a retail institution owned by member customers. A consumer cooperative is generally formed either because of dissatisfied consumers who's needs are not fulfilled by the existing retailers or on account of initiative by enlightened consumer. iii. Mother Dairy Case Mother Dairy was established in 1974 with a view of making liquid milk available to city consumers. It is set up by National Dairy Development Board under first phase of operation flood programme224. Mother Dairy also markets dairy products such as ice cream, dahi, lassi, butter cheese dairy whitener, Dhara range of edible oils and Safal of fresh fruit and vegetables frozen vegetables and fruit juices225.

223

R. Rastogi,. ―India : Country Report on E-Commerce Initiatives‖, Department of Information Technology, Ministry of

Communication and Information Technology, India, 2002 Available at http://www.unescap.org/tid/ publication/part three2261_ind.pdf, Last accessed on 01 October, 2012
224

Panle Jia, , . ―What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Anuradha Kalhan, , , ―Impact of Malls on Small Shops and Hawkers,‖ Economic and Political Weekly, Vol.42, No.22,

Industry,‖ Econometrica, Vol. 76, No. 6, 2008, pp. 1263–1316.
225

2007, pp.2063-66.

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Mother Dairy Model : Mother Dairy follows cooperative models. This model directs the formation of federation, by the help of village level societies and district level unions, whose prime responsibilities is the marketing of milk and milk products. Pricing Strategy : Mother dairy ensures that farmers get market price by offering quality produce and also provide the produce to the consumers at reasonable prices through minimizing costs. Challenges Faced: Company is facing competition from other organised retailers and increased imports. The quality of milk, low yields, falling cattle health are some major challenges faced by company. iv. Advantage to small farmers 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 so that their interests are not lost226.  Others i. Premature Indian retailers Indian retailers have yet to consolidate their position227. 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. ii. Upsetting import balance The examples of south-east Asian countries show that after allowing FDI, the domestic retailers were marginalized and this led to unemployment228. FDI in retailing can upset

226

Jerry A Hausman,. and Ephraim Leibtag, . ―Consumer Benefits from Increased Competition in Shopping Outlets: Anuradha Kalhan, and Martin Franz, ―Regulation of Retail: Comparative Experience,‖ Economic and Political David Neumark, Junfu Zhang, and Stephen Ciccarella,. ―The Effects of Wal-Mart on Local Labor Markets,‖ Journal

Measuring the effect of Wal-Mart‖, Journal of Applied Econometrics, Vol. 22, No. 7, 2007, pp. 1157–1177.
227

Weekly, Vol.44, No.32, 2009, pp.56-64.
228

of Urban Economics, Vol. 63, No. 2, 2008, pp. 405-430.

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the import balance, as large international retailers may prefer to source majority of their products globally rather than investing in local products229. iii. Margin of unorganised players 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, etc230. If prices were lowered then it would lower the margin of unorganized players231. As a result the unorganized market will be affected232. iv. Loss of foreign investment 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 basis233. 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 country234. v. Loss of culture Loss of cultural and ethical values due to more influence of the other cultures235. vi. Infant industry argument A concern raised by domestic incumbent firms in the organized retail sector is an infant industry argument: that this sector is under-developed and in a nascent stage. In this
229 230 231

Gupta, R., ‗Pharma retailing gains momentum in India‘, www.galtglobalreveiw.com E.A.S Sarma, , ―Need for Caution in Retail FDI,‖ Economic and Political Weekly, Vol.40, No.46, 2005, pp.4795-98. R.J. Volpe, R. J. and N. Lavoie, . ―The Effect of Wal-Mart Supercenters on Grocery Prices in New England,‖ Applied Department of Industrial Policy and Promotion, 2010. ―Foreign Direct Investment (FDI) in Multi-Brand Retail Arindrajit Dube, , Lester, T. William and Eidlin, Barry,. ―Firm Entry and Wages: Impact of Wal- Mart Growth on

Economic Perspectives and Policies, Vol. 30, No. 1, 2008, pp. 4 - 26.
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Trading,‖ Discussion paper. Available at http://www.dipp.nic.in, Last accessed on 06 October, 2012
233

Earnings Throughout the Retail Sector.‖, 2007 Available at http://ssrn.com/abstract=841684, Last accessed on 05 October, 2012.
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, Emek Basker,. ―Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion,‖ Review of Economic K. Gupta,D. Roy, and H. Vivek, Do small farmers gain from participation in producers‘ organizations? The case of

Statistics, Vol. 87, No. 1, 2005, pp. 174-183.
235

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view, it is important that the domestic retail sector grow and consolidate first, before being exposed to foreign investors236. Domestic firms in this sector oppose liberalizing retail to FDI as they view multinational companies as direct competitors237. vii. Findings of UK Competition Commission 2000 The UK Competition Commission found in a 2000 study of major retail chains including Marks & Spencer, Sainsbury and Tesco that ―the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers.‖238 Apart from prices, the report states that smaller farmers came under severe pressure from supermarkets due to the latter‘s requirement for large volumes of each product, pushing farmers to grow single crops rather than the multiple produce they would usually grow to minimise risk239. viii. Incumbent retailers Observed supermarket practices too may work against the interests of incumbent retailers, even organized ones. Supermarket chains routinely sell some products at lower than market prices, which appears to benefit consumers, but this puts pressure on small local stores and has an adverse impact on low-income and elderly consumers who rely on local shops240. Supermarkets also tend to alter prices in different branches adjusting to local rivals, ―price-flexing‖ as the UK Competition Commission termed it, again working to the disadvantage of local mom-and-pop stores241.
236

Emek Basker, 2005. ―Selling a Cheaper Mousetrap: Wal-Mart's Effect on Retail Prices,‖ Journal of Urban Economics, Mohan Guruswamy, , Kamal Sharma, Jeevan Prakash Mohanty, Thomas J Korah, ―FDI in India‘s Retail Sector: More

Vol. 58, No. 2, 2005 pp. 203-229.
237

Bad than Good?‖ Economic and Political Weekly, Vol.40 No.7, 2005, pp.619-23.
238

L.,J.Foster, Haltiwagner and C.J. Krizan ,The Link between Aggregate and Micro Productivity Growth Evidence from Emek Basker, . ―The Causes and Consequences of Wal-Mart's Growth.‖ Journal of Economic Perspectives, Vol. 21, Jerry A Hausman,. and Ephraim Leibtag,. ―NBER Working Paper No. w10712CPI Bias from Supercenters: Does the Keith Head, Ran Jing, and Deborah L. Swenson, 2010. ―NBER Working Paper No. 16288 From Beijing to

Retail Trade, Centre for Economic Studies, 2002
239

No.3, 2007, pp. 177-198.
240

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241

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PART 6: PRELIMINARY CONCLUSION
This concept note has been prepared to initiate this Working Paper on FDI in Multi-Brand Retail. This concept note is for prospective contributors to know the basic ideas and features of this policy. RGNUL-IPAN Research Team has done this preliminary research to take forward this debate. We have dealt comprehensively with all the associated factors which might impact or get affected by this retail sector policy. After this preliminary insight into the issue, few generalised conclusions which can be inferred are as follows:  Retail sector of any economy is one such area which is primarily governed by the local factors, preferences and conditions for growth. Thus, foreign investment in this sector largely has to adapt to the local conditions unlike other core areas like steel, mining, power, manufacturing etc where large foreign players have been able to modify the local economic environment according to their needs and suitability.  Retail Sector essentially goes according to the consumer psychology and not by the economic prowess of any industry player.  India is a highly complex and unique consumer market which is not at all comparable to any other economy in terms of its consumer preferences, consumer-retailer relationship and retailer margin patterns.  Most importantly, this policy in question at this stage of initial proposal cannot be stated to be highly beneficial or highly detrimental to the Indian economy. It will have a long gestation period before any such conclusion can be made out. The claims of govt. as well as the opposition are highly ill-founded and exaggerated. Nevertheless, these preliminary conclusions are purely on the basis of an initial study. We hope to receive highly critical contributions which either establish these notions or completely negate these general inferences. Specific case studies/questionnaires/interviews/impact evaluation reports from other countries will be preferred for acceptance and publication.

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