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Evalueserve Article

Retail FDI: The next growth booster for India?
Evalueserve believes that FDI in retail will be gradual because of the large-scale involvement of small retailers in the sector. International retailers, such as Wal-Mart, Tesco, and others need to monitor this space closely, as the potential in the Indian Retail sector is immense because of its sheer size. The market offers tremendous opportunities for all North American and European retailers and, obviously, none of them want to miss them. All retailers need to expand their portfolio and business, and the opportunities offered by India makes it an interesting topic for both strategists and board members. Farmers, organized retailers, logistics service providers, and customers are expected to be the key beneficiaries of FDI in retail. More specifically, small and medium-sized suppliers and the Indian contract logistics industry are most likely to witness a boost. Evalueserve expects both organized and unorganized retail to coexist in India; however, with organized retail leading growth. Will retail FDI usher in the next phase of economic liberalization in India, or will the government’s decision to hold FDI in multi-brand retail until a consensus is reached, hold back the country’s economic prospects in the long run. Evalueserve evaluates the promise held by the retail sector and its ability to lead the next phase of India’s economic liberalization. The enormous opportunity offered by India’s retail sector is evident from two vital facts: it accounts for 22 percent of India’s GDP and it is the second largest employer in the country, next only to agriculture. That the Indian government’s eventual decision to allow or disallow FDI in multi-brand retail will have a definite impact on the country’s economy is certain – whether it emphasizes on broader economic growth or on safeguarding the interest of indigenous players is something that only time will tell. As things stand now Retail sector contribution to India’s GDP (2009-10) Size (in billion USD) 1,500 1385

794 750

291 45 0 GDP PFCE* Retail Organized Retail | © 2011 Evalueserve. All Rights Reserved

In the organized retail market. depending on the strategy adopted by global players. At least half of the USD 100million investment has to be made to develop Indian rural infrastructure. while others. we see multi-brand retail (MBRT) and single-brand retail (SBRT) operating mainly through lifestyle and value retailing. What’s in store for international players? The entry of large organized retailers will increase competition in the retail market and lead to a need for strategic partnerships at all levels of the value chain. thus resulting in uneven representation across the country. and purchase 30 percent of their goods from small and medium-sized firms (typically local suppliers). albeit after a few hurdles.Source: Indian Retazil Report and CSO *PFCE: Private Final Consumption Expenditure 2 Policy reforms are taking place in India. Evalueserve believes this will boost the Indian contract logistics industry. with the former focused on category-specific lifestyle-focused products and the latter on discounts and value-for-money products. Others such as Business Monitor International. especially the warehousing and cold-chain services.evalueserve. have already entered the cash-and-carry market through joint ventures. such as Tesco and Wal-Mart.2 billion) in India’s cash-and-carry sector. Foreign players. such as Metro and Carrefour. Some estimates suggest that the segment will increase its contribution by up to 20 percent by 2020. partly due to state-level policies. retailers will have to invest a minimum of USD 100 million over five years. Organized retailers may adopt www. more than 900 companies attracted FDI worth INR 100 billion (approximately USD 2. Existing Foreign-Indian Partnerships in Retail Year Foreign Retailer 2003 Metro Indian Partner Type of Presence Wholly owned Metro Cash & Carry 2007 2008 2010 Wal-Mart Tesco Carrefour Bharti Tata Joint venture Joint venture Wholly owned Easyday StarBazaar Carrefour Wholesale Cash and Carry Source: Evalueserve Analysis Outlet Name Number of Units 8 9 1 From April 2006 to December | © 2011 Evalueserve. and to establish a cold-chain system. In 2011. for example. The organized retail sector in India has developed across regions of high population density. it accounted for only 7 percent of the retail segment. have opined that it will grow at an annual average rate of 25 percent to USD 785 billion by 2015. All Rights Reserved . The proposed FDI approval comes with certain restrictions. have independently entered the segment. unorganized retail will grow at 13 percent per annum until 2015. Allowing retail FDI will definitely have an impact on smaller indigenous players and several unorganized peers. which pegged India’s retail sector at USD 396 billion in 2011. while organized retail will expand at 45–50 percent. As per estimates. The impact can be mid-term to long-term.

as it will strengthen their balance sheet with capital infusion (lowering debt) and support their aggressive retail expansion plans. Evalueserve foresees the following strategic moves of such retailers: 3 Market Expansion Market Entry Adopt greenfield-investment way to enter the market Spiral Approach Initiate business in a large city Expand further while maintaining synergies in buying and logistics across regions Cluster Approach Set up a retail outlet in a metro Expand in tier-1 towns that are part of the cluster surrounded by the metro Establish independent direct-sourcing. smaller cash-strapped businesses in the retail space might be pressurized and succumb to take-over moves by larger players. the resultant increase in competition will enhance the bargaining power of consumers. of stores 3 262 1727 2. owing to their ability to provide a nation-wide platform. On the other hand. as foreign entities will pump in investment into supply chains. All Rights Reserved . Also.660 % growt h in 201011 25 EBITD A EBITD A margi n 10% Debt Debt/ Equity Ratio Capita l Expen diture 222 No.evalueserve. However. their attractiveness for foreign players. thereby lowering prices. as many of them are under tremendous debt pile up. and improve its financial | © 2011 Evalueserve. Evalueserve’s study indicates that large retailers such as Pantaloon and Shopper’s Stop are more likely to be the beneficiaries of retail FDI. distribution and logistics networks for each cluster Pyramidal Approach Set up a small number of hypermarket stores at strategic locations Launch a large number of small size convenience stores in neighborhoods and suburbs Spread supply chain costs across formats Sign a joint venture partnership to gain access to expertise and back-end operations of the partner Acquire an existing player to leverage skilled workforce. or the retail market as a whole. infrastructure.7 375 www. will make them suitable acquisition targets for larger foreign companies. and front-end property of the acquired firm Which pony will lead to the victory line? Many industry participants believe that the Indian retail sector is likely to benefit from the FDI policy in the long run. These benefits are otherwise unlikely in the near term because of cash-constrains. Company (Parent) Sales Pantaloon Retail India 2. increase operating efficiency.different strategies to enter and expand in a particular region.

Bhavya is an Associate Vice President. She has been involved in various projects with global clients in the retail. which will see the number of cities with a population of one million and above doubling by 2020. consumer electronics and FMCG.evalueserve. which is expected to account for 67 percent of total population by 2020. Thomson Financial. at Evalueserve. with organized retail increasing its share over time. with the entrance of foreign retailers.022 (Balance Sheet items) 5) All absolute numbers are in USD millions Source: Company Reports. OneSource and Evalueserve Analysis Evalueserve foresees the retail segment growing at an exponential rate. About the Authors Bhavya Sehgal is the principal author of this paper. Prior to joining Evalueserve. of stores 3 4 Private Limited 1 (Future Group) Shoppers Stop Ltd. We will closely follow whether India’s next growth phase is led by the sector. consumer durables and food & beverages space.000 is expected to increase from 14. foods | © 2011 Evalueserve.0218(P&L items) and .31 - 35 4 98 220 1) Represents consolidated financials for FYE June 2011 2) Represents consolidated financials for FYE March 2011 3) Includes stores across different formats and business models 4) Uses the following conversion ratios – INR to USD = 0. increasing urbanization. This growth will be propelled by an increasing proportion of working age population. logistics and consumer goods industries.6 percent in 2010 to 41. and rising disposable incomes.4 11 - 3% - 66 85 0. despite the policy reform uncertainty. www. as the number of households with annual disposable incomes of USD 5. Vani is a Manager at Evalueserve. Consumer Goods and Retail Practice.1 percent in 2020. Evalueserve sees organized and unorganized retail co-existing in India’s retail landscape. and leads the Consumer Goods and Retail Practice division at Evalueserve. 2 (Raheja Corp) Trent 2 (Tata) Spencer's Retail (RPG) Notes: 486 54 28 6% 57 0.. Bhavya specializes in identifying and executing cost and revenue generating knowledge processes for clients. She has extensively worked on subjects such as skin and beauty care. Vani worked with Shopper’s Stop Ltd.52 30 97 349 218 42 11. a multi-brand retail store chain in India.Company (Parent) Sales % growt h in 201011 EBITD A EBITD A margi n Debt Debt/ Equity Ratio Capita l Expen diture No. Bhavya has been associated with Evalueserve for over six years and has vast experience in developing and providing knowledge management solutions to the automotive. Vani Jain is the co-author of this paper.000– 15. All Rights Reserved .

com | © 2011 Evalueserve. The author disclaims any and all warranties as to the accuracy.Evalueserve Contact: 5 Email: marcom@evalueserve.evalueserve. All Rights Reserved . www. completeness or adequacy of such information and the author shall have no liability for errors. omissions or inadequacies in the information contained herein or for interpretations Disclaimer The information contained in this article has been obtained from sources believed to be reliable.