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Foreign Direct Investment in retailing

Foreign Direct Investment in retailing

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Foreign Direct Investment in retailing

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  1. Foreign Direct Investment in retailing By Peer Mohamed. S Shyam Sunder. P Sri Sai Ram Institute Of Management Studies Chennai- 44

  2. “The minds of the Indian consumers is changing along with their lifestyle”

  3. Evolution Of Indian Retail Exclusive Brand Outlets Hyper/Super Markets Department Stores Shopping Malls PDS Outlets Khadi Stores Cooperatives Convenience Stores Mom and Pop/Kiranas Modern Format Shopping Experience/ Efficiency Weekly Markets Village Fairs Melas Govt.Supported Low costs Pervasive Reach Neighborhood/ Convenience stores Rural Reach Source of entertainment

  4. Categories of Indian Retail • Corporate Houses • Tata : Tata Trent, westside, Landmark • RPG group: Spencers daily,Health and Glow, music world etc • ITC : Wills Life Style • Dedicated brand outlets • Nike, Reebok, Zodiac etc • Multi-brand outlets • Vasanth & co, Viveks etc • Manufacturers/ Exporters • Pantaloons, Bata, Weekender

  5. Unorganized Retailers Typically small Retailers Evasion of taxes No monitoring of labour laws Organized Retailers Typically Large Retailers Must pay Tax High level of labour mechanism Differentiation Organized Retailers 2% Unorganised Retailers 98%

  6. Growing Middle Class • Indian middle class has grown 57 mn by 2001-02 since 1995-96. • It is expected to cross 92 mn by 2005-06 & 153 mn by 2009-10. • The younger population translated into higher propensity to spend. • This growth in middle class will fuel the growth in retail.

  7. Pitfalls in Indian retail • Low domestic competition • Lack of exposure to global best practices • Low entry barriers for unorganized retailers • Moderate entry barriers for organized retailers • Wide difference in treatments of small & large retailers

  8. Entry of FDI in retail • India allowed to own up to 49% of retail ventures –time frame of 3-5 years • India has ranked no.1 in 2005 global retail development, index released by AT Kearney recently • Giants such as Wal-Mart and Tesco are keen in expanding their business in India • Entry of FDI through joint ventures with local players

  9. Benefits from FDI in retail • Improve competition • Best practices in retailing • More choice for the customers • Global market for Indian producers • Employment opportunity • Better infrastructure and customer Facilities

  10. Standing challenges • Government Regulations • Lack of trained manpower • Availability of quality real estate • Logistical support • Competition of local players • The format does not suit rural India • Purchasing patterns not very conducive

  11. Case Study: Chinese Retailing • FDI permitted in 1992. 40 foreign retailers have secured approval • Retail sales have grown@13.5% CAGR since FDI was permitted • FDI initially restricted to 6 major cities (including Beijing, Shanghai and Guangzhou) and SEZs • Foreign ownership initially restricted to 49% • US$ 22 bn of FDI attracted, 3.6% of total FDI • In 2003, FDI in wholesale and retail was US$ 1.1 bn (Around 30% of our total FDI in 2003) • Current restrictions on FDI will be phased out over 5 years as condition of WTO entry

  12. FDI in retail allowed China after FDI 375 300 225 150 75 9 2 7 8 8 0 8 5 9 0 9 1 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 Years • Retail sales grew @ 19.6% CAGR for the next 4 years after the introduction of FDI in 1992

  13. Lessons from china • FDI improves the entire size of the industry • Retailing in China has grown at a compound rate of 15% per annum after FDI inflow • Local players can survive and even beat foreign competition • Employment growth • Evolution of modern formats

  14. Conclusion