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 governments decision to hold FDI in multi-brand retail until a consensus is reached, hold back the countrys economic prospects in the long run. Evalueserve evaluates the promise held by the retail sector and its ability to lead the next phase of Indias economic liberalization. The enormous opportunity offered by Indias retail sector is evident from two vital facts: it accounts for 22 percent of Indias GDP and it is the second largest employer in the country, next only to agriculture. That the Indian governments eventual decision to allow or disallow FDI in multi-brand retail will have a definite impact on the countrys 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 Indias GDP (2009-10) Size (in billion USD) 1,500 1385

794 750

291 45 0 GDP PFCE* Retail Organized Retail

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Source: Indian Retazil Report and CSO *PFCE: Private Final Consumption Expenditure

Policy reforms are taking place in India, albeit after a few hurdles. As per estimates, unorganized retail will grow at 13 percent per annum until 2015, while organized retail will expand at 4550 percent. Allowing retail FDI will definitely have an impact on smaller indigenous players and several unorganized peers. The impact can be mid-term to long-term. depending on the strategy adopted by global players. The proposed FDI approval comes with certain restrictions, for example, retailers will have to invest a minimum of USD 100 million over five years, and purchase 30 percent of their goods from small and medium-sized firms (typically local suppliers). Evalueserve believes this will boost the Indian contract logistics industry, especially the warehousing and cold-chain services. At least half of the USD 100million investment has to be made to develop Indian rural infrastructure, and to establish a cold-chain system. The organized retail sector in India has developed across regions of high population density, thus resulting in uneven representation across the country, partly due to state-level policies. In 2011, it accounted for only 7 percent of the retail segment. Some estimates suggest that the segment will increase its contribution by up to 20 percent by 2020. Others such as Business Monitor International, which pegged Indias retail sector at USD 396 billion in 2011, have opined that it will grow at an annual average rate of 25 percent to USD 785 billion by 2015. In the organized retail market, we see multi-brand retail (MBRT) and single-brand retail (SBRT) operating mainly through lifestyle and value retailing, with the former focused on category-specific lifestyle-focused products and the latter on discounts and value-for-money products. Whats 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. Foreign players, such as Tesco and Wal-Mart, have already entered the cash-and-carry market through joint ventures, while others, such as Metro and Carrefour, have independently entered the segment. 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 2010, more than 900 companies attracted FDI worth INR 100 billion (approximately USD 2.2 billion) in Indias cash-and-carry sector. Organized retailers may adopt

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different strategies to enter and expand in a particular region, or the retail market as a whole. Evalueserve foresees the following strategic moves of such retailers:

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, 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, infrastructure, 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, as foreign entities will pump in investment into supply chains, increase operating efficiency, and improve its financial health. However, the resultant increase in competition will enhance the bargaining power of consumers, thereby lowering prices. Evalueserves study indicates that large retailers such as Pantaloon and Shoppers Stop are more likely to be the beneficiaries of retail FDI, as it will strengthen their balance sheet with capital infusion (lowering debt) and support their aggressive retail expansion plans. These benefits are otherwise unlikely in the near term because of cash-constrains. On the other hand, smaller cash-strapped businesses in the retail space might be pressurized and succumb to take-over moves by larger players, as many of them are under tremendous debt pile up. Also, their attractiveness for foreign players, owing to their ability to provide a nation-wide platform, will make them suitable acquisition targets for larger foreign companies.

Company (Parent)

Sales

Pantaloon Retail India

2,660

% growt h in 201011 25

EBITD A

EBITD A margi n 10%

Debt

Debt/ Equity Ratio

Capita l Expen diture 222

No. of stores 3

262

1727

2.7

375

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Company (Parent)

Sales

% growt h in 201011

EBITD A

EBITD A margi n

Debt

Debt/ Equity Ratio

Capita l Expen diture

No. of stores 3

Private Limited 1 (Future Group) Shoppers Stop Ltd. 2 (Raheja Corp) Trent 2 (Tata) Spencer's Retail (RPG)
Notes:

486

54

28

6%

57

0.52

30

97

349 218

42 11.4

11 -

3% -

66 85

0.31 -

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 = 0.0218(P&L items) and .022 (Balance Sheet items) 5) All absolute numbers are in USD millions Source: Company Reports, Thomson Financial, OneSource and Evalueserve Analysis

Evalueserve foresees the retail segment growing at an exponential rate, despite the policy reform uncertainty. This growth will be propelled by an increasing proportion of working age population, which is expected to account for 67 percent of total population by 2020; increasing urbanization, which will see the number of cities with a population of one million and above doubling by 2020; and rising disposable incomes, as the number of households with annual disposable incomes of USD 5,000 15,000 is expected to increase from 14.6 percent in 2010 to 41.1 percent in 2020. Evalueserve sees organized and unorganized retail co-existing in Indias retail landscape, with organized retail increasing its share over time. We will closely follow whether Indias next growth phase is led by the sector, with the entrance of foreign retailers. About the Authors Bhavya Sehgal is the principal author of this paper. Bhavya is an Associate Vice President, Consumer Goods and Retail Practice, at Evalueserve. Bhavya has been associated with Evalueserve for over six years and has vast experience in developing and providing knowledge management solutions to the automotive, logistics and consumer goods industries. Bhavya specializes in identifying and executing cost and revenue generating knowledge processes for clients. Vani Jain is the co-author of this paper. Vani is a Manager at Evalueserve, and leads the Consumer Goods and Retail Practice division at Evalueserve. She has been involved in various projects with global clients in the retail, consumer durables and food & beverages space. She has extensively worked on subjects such as skin and beauty care, foods technology, consumer electronics and FMCG. Prior to joining Evalueserve, Vani worked with Shoppers Stop Ltd., a multi-brand retail store chain in India.

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Email: marcom@evalueserve.com Disclaimer The information contained in this article has been obtained from sources believed to be reliable. The author disclaims any and all warranties as to the accuracy, 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 thereof.

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