Foreign Investment in Muti-Brand Retail – Part -1

The Government is engaging into discussions to open Multi-Brand Retailing for Foreign Companies. You can Study the Current Foreign Investments in Indian Retail sector here. With recent discussions, we believe that modern retail sector will be opened with certain restrictions, like – 1. JV with local retailers, capping the FDI holding to 49/51%; 2. Minimum 50% of investment on setting up back-end supply chain (Cold chains, warehouses, etc.); 3. Restriction on Cities in which foreign retailers can come in (e.g., 40 cities with population of more than 1mn); 4. some sourcing and business opportunities to be given to SMEs.

This should help the sector to realize its potential of becoming a US$250bn industry by 2020 vs. the current US$10bn size.

The main issues are – What are the likely Changes and Why this Could happen. Who will be the Gainers of this Move and When is it expected to happen.

Likely Changes & Why ?

Based on the feedback to the Government on the Working paper, data suggests the following changes,
Phased Opening: JV with up to 49/51% FDI is likely to be allowed. This will help to transfer the technology and global best practices. Later after few years, the equity component will be enhanced to 100% for foreigners.

Segment Restriction:Most likely it will be restricted to Food & Beverages segment.

Limited geographical reach: There is likely to be a restriction on the cities in which foreign retailers can enter – 40 cities with populations of more than 1mn. These cities already have a high penetration of domestic modern retail, which has coexisted well with traditional trade.

Encourage Supply Chain:India loses a high proportion of its farm produce due to highly underdeveloped supply-chain infrastructure, the govt could expect foreign retailers to invest a minimum of 50% of their investment on setting up back-end supply chain systems (Cold chains, warehouses, etc.)

Encourage Local SMEs: A minimum percentage of sourcing that would have to be from domestic SMEs to mitigate the risk of global retailers outsourcing procurement to their lower-cost foreign suppliers.

Why these Changes are Possible ?

India’s traditional retail is run by 8mn mom & pop shops and it supports the employment of 30mn people. It is feared that the entry of foreign retailers would not only hurt this large population base, but also impact other local industries that supply to the traditional retail. The following issues suggest that these Changes are a Welcome move.

Remove Hurdles for high Food Inflation: The move has been positioned as a tool for controlling intermediaries (wholesalers, mandis) that have been held responsible for creating artificial food inflation. Also, it helps improve the supply chain and cut down on food wastage.

Beneficial For Masses & Producers:The supply chain set up by modern retailers will help improve farmer realizations by ~50%, while cutting down end-consumer prices, as intermediaries will be unable to make super-normal profits.

Limited impact on Mom & Pop Stores: We have already seen that domestic Modern Retail has not made any difference to Mom & Pop / Neighborhood stores. Hence, this move is unlikely to have a major negative impact and Government will gradually open the doors.

In the next part we will discuss – Gainers & When this will happen ? What do you folks have to say ?