FDI in Multi Brand Retail Trade – The Journey
Dinodia Capital Advisors September 2012
Executive Summary For more than a year, every problem in India has been blamed on the incumbent government by national and international lobbies and “Policy Paralysis” has been the reason cited for every shortfall including the falling rupee, the worsening fiscal deficit, high inflation, high interest rates and delayed capital expenditure plans On September 14, 2012 the government broke the shackles and came out with the much needed and highly anticipated reforms regarding Foreign Direct Investment (FDI) in the Multi-brand Retail Sector (MBRT) of India with a surety of no roll – back this time Dinodia Capital Advisors‟ view is that these reforms will create price competition and remove the multiple layers of inefficiency between the farmers and the final retailer and hopefully help the farmers and producers of goods realize a bigger share of the pie in the long-run Given the current negative sentiment of foreign investors (post Vodafone and Draft GAAR Guidelines) and the lack of capital inflows in India, these reforms will encourage foreign firms to give India a serious look and encourage them to invest capital in the country As foreign firms who partner with local Indian firms are able to generate profits and achieve success in India it will encourage FDI in other sectors as well and create a positive image for India globally as a good place to do business!
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The Story So Far…. Union Cabinet approved 51% FDI in multi-brand retail Increasing the FDI limit in single brand retail to 100% However the implementation was deferred, for evolving a broader consensus on the subject
2011
2012
2010 2006 1997
DIPP had put up a discussion paper proposing FDI in multi-brand retail
FDI permitted in cash & carry, wholesale trading comes under the automatic route FDI in single brand retail was permitted to the extent of 51%
100% FDI being permitted in cash & carry wholesale trading under the government approval route *DIPP: Department of Industrial Policy and Promotion
January DIPP notified the decision to allow 100% FDI in Single brand retail September Union Cabinet approves the FDI limit in Multi brand retail of 51%
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The Policy - Single Brand Retail Trading EARLIER For Single Brand Retail Trading (SBRT) sector – only 51% FDI permitted – subject to approvals and conditions such as:
NOW FDI in single brand retail trading is permitted up to 100% with Government approval
Products should be of a „Single Brand‟ only
Products to be sold should be of a „Single Brand‟ only
Products to be under the same brand in one or more countries if are sold outside India
30% sourcing is to be done from micro and small industries (investment in Plant and Machinery not exceeding US $ 1mm)
„Single Brand‟ products should be branded during manufacturing
This condition will ensure that SME sector, including artisans, craftsman, handicraft and cottage industry gets the benefits of liberalization
The foreign investor should be the owner of the brand
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The Policy - Multi Brand Retail Trading EARLIER
NOW
FDI in Multi Brand Retail Trading was not allowed
FDI in Multi Brand Retail Trade is permitted up to 51%, subject to following conditions: Outlets to be set up - only in cities with a population of more than 1m (within a 10km range)* Minimum investment by the foreign investor US $100mm and at least 30% of the procurement of manufactured / processed products shall be sourced from 'small industries‟ (investment in Plant and Machinery not exceeding US $1million) Sourcing requirements will be checked together for first five years – after that on a annual basis Retail trading by means of e-commerce – not permissible
* States in favor of FDI in MBRT - Andhra Pradesh, Assam, Delhi, Haryana, J&K, Maharashtra, Manipur, Rajasthan, Uttarakhand and Daman & Diu and Dadra Nagar Haveli ** Back-end Infrastructure includes supply chain, logistics and warehousing but not land and rentals
At least 50% of total FDI brought in shall be invested in „back-end infrastructure‟** within three years of the induction of FDI
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SWOT Analysis of FDI in Retail
S
TRENGTHS
O
• Retail is a $450bn Industry in India • Young and dynamic manpower • Highest shop density in the world • High growth rate in retail & wholesale trade • Presence of big industrial houses with deep pockets
PPORTUNITIES
• High employment generation in the future • Will enhance financial condition of farmers • Encourage foreign capital inflows • Result in increasing supply-chain efficiency • Improve Logistics & Infrastructure
W
T
EAKNESSES
• High capital investment required in the retail sector (real estate) • Lack of trained and educated work force • Higher prices as compared to local shops • Will mainly cater to high-end consumers placed in metros HREATS
• Effect on the small retailers - local Kirana stores (mom-pop stores) • Long gestation period - Foreign Retailers will take a while to adapt to India and generate profits • States not buying in so efficiencies expected may not be achieved
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Rough ride so far….. It is not easy to be successful in a place where culture, tradition and food habits change every 124 miles Some of the largest and most prominent Indian business houses such as Reliance, Godrej, RPG and the Future Group have all struggled in the Retail Industry in India1. These large players have lost a significant amount of money and in fact one of the leaders in the space, Subhiksha, which at one time had almost 1,600 outlets has shut down India‟s image is one of a “fickle policy maker” with regulations being frequently changed, rolled back and even retrospectively amended have made investors speculative
Subsequent populist decisions are feared, such that the foreign retailers may not be able to achieve dominant market positions or buy / rent at the right locations
1In order to read a detailed report on the Indian Retail Industry please visit: http://www.dinodiacapital.com/research.asp
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Hidden Opportunity despite the rough ride A comparison of the Retail Industry in Emerging Markets shows that India actually has the lowest organized retail sector amongst its peers and therefore is the biggest opportunity India‟s closest peer in terms of size of population, China, has an organized retail market that is almost 3x the size of the market in India. A country like Brazil which is less than a 1/6th of India in terms of population has a organized retail market of almost 6x of that of India and mostly homogeneous tastes across the country making it easy to standardize offerings Indonesia which is the largest economy in Southeast Asia and often cited as replacing India as the “I” in BRIC economies has displayed strong growth in 2011 and in the first half of 2012 with significant growth in the Retail sector. It has only 1/5th of India’s population and yet has a organized retail sector which is 5x of that of India There are two ways to look at the above data. One is to see that there are plenty of emerging markets where more capital could be deployed in retail, but the other is to see the hidden opportunity in investing in the retail sector in India (the 2nd largest country in the world in terms of population) where there is a white canvas and wide spaces and the story of organized retail can be painted in whichever way the potential foreign entrants desire 7
Global Experience of FDI in Retail Emerging Markets which allowed FDI in Retail with the share of organized retail in the overall retail industry:
India • FDI allowed 51% in Multibrand & 100% in Single Brand • Population 1,210m • Share of organized retail 5-6% • Top Retailer: Future Group
Brazil • FDI allowed 100% • Population 205.7m • Share of organized retail 36% • Top Retailer: Pao de Acucar
Russia • FDI allowed 100% • Population 143.1m • Share of organized retail 33% • Top Retailer: X5 Retail Group
China
Indonesia
• FDI allowed 100%, up from 49% in 1992 • Population 1,343m • Share of organized retail 20% • Top Retailer: Bailian Group Co Ltd
• FDI allowed 100% in 1998 • Population 242.3m • Share of organized retail 30% • Top Retailer: Matahari Putra Prima
8 Source : Goldman Sachs, Technopak
Steps to Establish Presence in India Find a Joint Venture Partner – The maximum equity stake which a Foreign investor can hold cannot be more than 51%, therefore it will have to find an Indian partner to enter into a Joint Venture with
Look for space – It will have to look for a city with a minimum population of 1 million as per the 2011 census. India comprises of about 51 cities which meet the condition. Further state government and FIPB permissions will be required
Get it approved - All the regulatory approvals of FDI and other applicable laws will have to be obtained, which will be easier to do, given the presence of Indian partner 9
Proposed Business Model
Indian Partner - To provide 49% stake in form of capital / infrastructure or leverage their network to establish presence -They will also be able to navigate the political and legal hurdles as well as use their local knowledge and brand
Foreign Partner - To provide capital of at least US $100mm - They will bring technology, efficiency in supply chain management and global experiences from previous ventures
Outcome: - There is a possibility of a mutually symbiotic relationship between the Foreign and Indian Partner to jointly harness their capabilities and create a world-class Retailer in India, which will have the unique advantage of a being the first mover and establishing the benchmark of excellence for the Industry
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The ride despite the speed breakers … There is clearly an opportunity for the Domestic Giants, Kirana Stores and the Foreign Retailers to co-exist in India The Wal-Mart model, offers every-day low pricing, but are typically in far-off locations, have a homogenous selection of products across their stores, typically need 150,000 sq feet of space and require a car to get to. India is years away from when majority of its population will have the ability to only shop at the Wal-Marts of the world. Competition will force the Kirana Stores to lift their game, become more price competitive, have a better selection of goods at lower prices and maintain proper records of customers (people will still shop there for proximity, comfort of relationship and easy credit) Foreigners will bring to India their expertise and efficiency in retailing, they will invest capital in improving logistics and infrastructure in India (for example: Cold Storage Logistics is still almost non-existent in India) and share technology and know-how with their local Indian Partners, but will also be able to become profitable over a period of time as their brands and presence increase across the country Hopefully, the Domestic Giants will learn the best practices from their foreign counterparts and just as in Brazil foreign retailers thrive but still a local player is the most dominant (Pao de Acucar) India will see a much more inclusive and efficient Retail Industry 11
The ride despite the speed breakers … On the whole, if India has to grow it needs capital, training and innovation. Yes the short-term effects of the announced reforms will be painful, but in the long-term if they will help make Retail a more organized industry in India, provide better quality goods at cheaper prices at convenient locations, improve infrastructure and the supply chain mechanism throughout the country, provide employment and retail sector specific training to a large population it will be a huge boon to the nation Foreign Retailers who are looking to make a quick profit are better off investing elsewhere. But those who are willing to be patient and make a more long-term bet on India, definitely have the opportunity to “HIT THE BULLS EYE.” India is a virtually untapped and a huge growing market in terms of the Organized Retail Industry ($450bn industry, with only 5-6% organized retail). The foreign players who are willing to learn from their mistakes in other emerging markets and early experiences in India, go through a careful partner selection process, understand the political / legal / external hurdles and invest with a realistic time horizon truly have an unique opportunity to create win-win situations for all stakeholders. Several other sectors have seen foreign entrants with a successful and profitable model in India (Dominos, Citigroup, Honda etc). Our view is that the FDI in Retail will unfold in a similar manner in the times to come! 12
Dinodia Capital Advisors
Dinodia Capital Advisors ď ą Corporate Profile Dinodia Capital Advisors is a Financial Consulting firm based in New Delhi, India. It assists clients across all industries grow, both organically and inorganically. The firm helps clients Raise Capital. Execute Merger & Acquisition opportunities. Restructure, Transform and Turnaround businesses. Resolve challenging problems. Take advantage of financial and strategic opportunities. Balance investor expectations. DELIVER VALUE 13
Dinodia Capital Advisors Service Offerings Dinodia Capital Advisors Advice Clients on : Mergers and Acquisition
Capital Raising
We help in conducting a robust scan of the market and selecting the most suitable buyer or seller
We advice clients on their capital needs and find them the right partner who brings more than just capital
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For Further Details, Contact :
Pankaj Dinodia Chief Executive Officer Email: pankaj.dinodia@dinodiacapital.com
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