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PROJECT REPORT ON

Indian Retail Sector and the Impact of FDI

SUBMITTED BY
SHACHI MODY

T.Y.B.M.S. [Semester V]

MITHIBAI COLLEGE
VILE PARLE (WEST)

SUBMITTED TO

UNIVERSITY OF MUMBAI
ACADEMIC YEAR

2006 - 2007
NAME OF PROJECT CO-ORDINATOR
PROF. S. CHATTERJEE

DATE OF SUBMISSION
8th September, 2006
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DECLARATION
I, Ms. Shachi Mody, of Mithibai College of TYBMS [Semester V] hereby declare
that I have completed my project, titled Indian Retail Sector and the Impact of
FDI in the Academic Year 2006-2007. The information submitted herein is true
and original to the best of my knowledge.

________________________
Signature of Student
[Shachi Mody]

CERTIFICATE
I, Prof. S. CHATTERJEE, hereby certify that Ms. Shachi Mody of Mithibai
College of TYBMS [Semester V] has completed her project, titled Indian Retail
Sector and the Impact of FDI in the academic year 2006-2007. The information
submitted herein is true and original to the best of my knowledge.

_________________________
Signature Of The Principal
[Dr. Kiran V. Mangaonkar]

__________________________
Signature Of The Project Co-ordinator
[Prof. S. Chatterjee]

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ACKNOWLEDGEMENTS
This project is a result of efforts not only by one person but by a few more
people who have made the process easier through their support and help. This
project would have been incomplete without their contribution and therefore I
take this opportunity to thank them.
I would like to thank our co ordinator Prof. Mrs. Neela Nair who gave us
the opportunity to prepare this project.
I would also like to thank my project guide Prof. Mrs. Sonali Chatterjee
who provided continuous guidance for the project.
I would like to thank the college library which provided great help by
lending useful books throughout the process.
I would like to thank my family and friends in encouraging and providing
constant support to make this project.

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OBJECTIVE & RESEARCH METHODOLOGY

The main objective of preparing this project report is to understand the
developments taking place in the Indian Retail Sector and the opportunities that it
will provide to the consumers. Through this analysis it will be possible to project
the progress and development of the Indian economy. This sector has been
chosen as it is expected to provide employment opportunities to a vast number
and at the same time reflect a positive and competitive economic growth.
Hopefully, the reader gets a true insight of the sector and the problems
pertaining to it.
The research methodology involves analysis from various reports on the
Indian Retail Sector by various research companies like AT Kearney, Images
Retail, Retailbiz, etc. The information has been classified from these reports and
posted therein. The research is also based on some books on the Indian retail
sector. The information regarding the foreign investment policies and procedures
has been sourced from the official website of Planning Commission of
Government of India planningcommission.nic.in. This research also includes
information accumulated from surveys and interviewing the actual retailers.
This research has also been supported by newspaper articles which helped in
refining the information.
Thus, the research methodology has been a blend of primary and
secondary information put across in lucidly.

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EXECUTIVE SUMMARY
This project titled Indian Retail sector and Impact of FDI enlightens on the
Retail scenario of India.
This report gives a brief introduction of the retailing along with its
importance. An overview of the sector is given with its classification into the
retailing formats prevalent in India. This project also details out the factor causing
the low productivity of the retail sector besides other impediments to this sector.
It also gives an insight about the role of FDI in Indian Retail Sector
and its impact on it.
The technology used in retailing has also been highlighted combined with
the overview of the current scenario of the Indian Retail sector. This has been
supported by surveys and articles. This project also lays down the future growth
of this sector and its consequences.
To conclude it, some recommendations and suggestions regarding
changes in policy and other measures have been explicitly laid down.
In simple words, this project gives a thorough insight of the current
retail scenario and its growth potential.

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TABLE OF CONTENTS
Sr. No.

Contents

6.
6.1
6.2
6.3
7.

Section I: Indian Retail Sector

Introduction
What is retailing?
Who is a retailer?
Types of Retailers
Importance
Future
Overview of Indian Retail Sector
Overview
Classification
Features
Evolution
Structure of Indian Retail Sector
Traditional formats
Modern formats
Productivity Performance
Performance
Reasons for low productivity
Problems faced by Retail Sector
Internal factors
External factors
Section II: Impact of FDI
Introduction to FDI
Overview
Policy & Procedures
Graphs
FDI in Retail

7.1
7.2
7.3
8.
8.1
8.2
8.3
9.
9.1
9.2
9.3
9.4
9.5

Current scenario
Benefits of FDI in Retail
Concerns regarding FDI in retail
Technology in Retail
RFID Tags
Bar Coding
Awareness In Indian retail
Current Scenario of Indian Retail Sector
Features
Upcoming areas
Indian Retail by 2006 07
Case Study [Reliance Retail]
Changing Consumer Behaviour

1.
1.1
1.2
1.3
1.4
1.5
2.
2.1
2.2
2.3
2.4
3.
3.1
3.2
4.
4.1
4.2
5.
5.1
5.2

Page No.
1
2
2
4
5
6
9
10
12
13
14
17
18
25
26
34
36
39
42
43
43
47
50
52
53
53
55
55
58

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9.6
10.
10.1
10.2
11.
12.

Articles on Recent Developments in Indian Retail Sector

Recommendations for Indian Retail sector
Policy Recommendations
Other Measures
Conclusion
Annexure

62
65
68
69
70

Section 1: Indian Retail Sector

1. INTRODUCTION
1.1 What is retailing?
Etymologically, Retail comes from the French word retaillier which refers
to "cutting off, clip and divide" in terms of tailoring (1365). It first was recorded as
a noun with the meaning of a "sale in small quantities" in 1433 (French). Its literal
meaning for retail was to "cut off, shred, paring".
Retailing consists of the sale of goods/merchandise for personal or
household consumption either from a fixed location such as a department store
or kiosk, or away from a fixed location and related subordinated services. In
commerce, a retailer buys goods or products in large quantities from
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manufacturers or importers, either directly or through a wholesaler, and then sells

individual items or small quantities to the general public or end user customers,
usually in a shop, also called store. Retailers are at the end of the supply chain.
Marketers see retailing as part of their overall distribution strategy.
There are various definitions to retailing. Some of them are:

Consists of those business activities involved in the sale of goods and

services to consumers for their personal, family, or household use.

All transactions in which the buyer intends to consume the product

through personal, family or household use.

All activities directly related to the sale of goods and services to the
ultimate consumer for personal, non-business use.

The activities involved in selling commodities directly to consumers.

In other words, retailing is the final step in the distribution of merchandise -

the last link in the Supply Chain - connection the bulk producers of commodities

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to the final consumers. Retailing covers diverse products such as food,

apparels, consumer goods, financial services and leisure.
1.2 Who is a retailer?
The retailer is the one who acts as the final stock point who makes
products or services available to the consumer whenever required. Hence, the
value proposition a retailer offers to a consumer is easy availabilities of the
desired product in the desired sizes at the desired times.
According to Kotler, a retailer is any business enterprise whose sales
volume comes primarily from retailing.
The following diagram shows where the retailer stands in the supply chain.

Retailers
Manufacturer
Distributors/Wholesalers

Consumers

Therefore, from the diagram we can conclude that, retailer is a person

who comes in direct contact with the consumer. Hence, retailing includes all the
activities involved in selling goods or services directly to final consumers for
personal, non business use.

1.3 Types of Retailers:

Consumers can shop for goods and services in a wide variety of retail
organizations. There are store retailers, non store retailers and retail
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organizations. The following list shows the various kinds of retailers or retail
stores existing in the market:
Specialty Store: It has a narrow product line. E.g.: The Body Shop, The
Limited, etc.

Department Store: It has several product lines. E.g.: Bloomingdales, etc.

Supermarket: Large, low cost, low margin, high volume, self service
store designed to meet total needs for food and household products. E.g.:
Kroger, Jewel, etc.

Convenience Store: Small store in residential area, often open 24/7,

limited line of high turnover convenience product plus takeout. E.g.: 7
Eleven, Circle K, etc.

Discount Store: Standard or specialty merchandise; low price, low

margin, high volume stores. E.g.: Wal Mart, Kmart, Circuit City, etc.

Off Price retailer: Leftover goods, overruns, irregular merchandise sold

at less than retail. They include factory outlets, independent off price
retailers. E.g.: T.J. Maxx, Filenes Basement, etc.

Superstore: Huge selling space, routinely purchased food and household

items and services. E.g.: Petsmart, Home Depot, Jewel, Osco, etc.

Hypermarket:

Huge stores that combine supermarket, discount and

warehouse retailing. E.g.: Carrefour in France, Pyrca in Spain, etc.

Catalog Showroom: Broad selection of high mark up, fast moving,

brand name goods sold by catalog at discount. Customers pick up the
merchandise at the store. Eg: Edge Ski and Bike.

1.3.1 The retailers can be categorized depending upon the level of service
offered by them. The following are the general four levels of service for retailers:

Self - Service: Self Service is the cornerstone of all discount operations.

Many customers are willing to carry out their own locate compare
select process to save money.

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Self Selection: Customers find their own goods, although they can ask
for assistance.

Limited service: These retailers carry more shopping goods, and

customers need more information and assistance. The stores also offer
services (such as credit and merchandise return privileges).

Full service: Salespeople are ready to assist in every phase of the locate
compare select process. Customers who like to be waited on prefer
this type of store. The high staffing cost, along with the higher proportion
of specialty goods and slower moving items and the many services,
results in high cost retailing.

1.4 Why is retailing important?

As the final link between consumers and manufacturers, retailers are a
vital part of the business world. Retailers add value to products by making it
easier for manufactures to sell and consumers to buy. It would be very costly
and time consuming for one to locate, contact and make a purchase from the
manufacturer every time one wants to buy a candy bar, a sweater or a bar of
soap. Similarly, it would be very costly for the manufactures of these products to
locate and distribute them to consumers individually. By bringing multitudes of
manufacturers and consumers together at a single point, retailers make it
possible for products to be sold, and, consequently, business to be done.
Retailers also provide services that make it less risky and more fun to buy
products. They have salespeople on hand who can answer questions, may offer
credit, and display products so that consumers know what is available and can
see it before buying. In addition, retailers may provide many extra services, from
personal shopping to gift wrapping to delivery, that increase the value of products
and services to consumers.

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1.5 Future of Retailing:

Advances in technology, like the Internet, have helped make retailing an
even more challenging and exciting field in recent years. The nature of the
business and the way retailing is done are currently undergoing fundamental
changes. However, retailing in some form will always be necessary. For
example, even though the Internet is beginning to make it possible for
manufacturers to sell directly to consumers, the very vastness of cyberspace will
still make it very difficult for a consumer to purchase every product he or she
uses directly. On-line retailers, like Amazon.com, bring together assortments of
products for consumers to buy in the same way that bricks-and-mortar retailers
do. In addition, traditional retailers with physical stores will continue to be
necessary. Retailers who offer personal services, like hair styling, will need to
have face-to-face interaction with the consumer.

But even with products,

consumers often want to see, touch and try them before they buy. Or, they may
want products immediately and won't want to wait for them to be shipped. Also,
and perhaps most importantly, in many cases the experience of visiting the
retailer is an important part of the purchase. Everything that the retailer can do to
make the shopping experience pleasurable and fun can help ensure that
customers come back.

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2. OVERVIEW OF THE INDIAN RETAIL SECTOR

2.1

An overview:
Retail is an extremely important sector in the economy, but has been

overlooked by Indias policy makers. This sector, with reforms, is capable of

creating 8 million jobs in the next 10 years and providing job opportunities for
people transitioning from agriculture. Further, as the sector develops, prices of
goods will fall thereby raising the standard of living of people across the
economy.
The retail market size in India is estimated to be around $180 billion.
Retailing provides jobs to almost 15 percent of employable Indian adults, and it
perhaps the largest contributor to India's GDP.
The retail sector in India is witnessing a huge revamping exercise
as traditional markets make way for new formats such as departmental stores,
hypermarkets, supermarkets and specialty stores. Western-style malls have
begun appearing in metros and second-rung cities alike introducing the Indian
consumer to a shopping experience like never before.
Rated the fifth most attractive emerging retail market, India is being seen
as a potential goldmine. It has been ranked 2 nd in a Global Retail Development
Index of 30 developing countries drawn up by A T Kearney. The list was
developed as a response to requests from retail chains facing saturated demand
in most western markets.
As the Corporates the Piramals, the Tatas, the Rahejas, ITC,
S.Kumars, RPG Enterprises, and mega retailers- Crosswords, Shoppers Stop,
and Pantaloons race to revolutionize the retailing sector, retail as an industry in
India is coming alive. Retail sales in India amounted to about Rs.7400 billion in
2002, expanded at an average annual rate of 7% during 1999-2002. With the
upturn in economic growth during 2003, retail sales are also expected to expand

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at a higher pace of nearly 10%. Across the country, retail sales in real terms are
predicted to rise more rapidly than consumer expenditure during 2003-08. The
forecast growth in real retail sales during 2003- 2008 is 8.3% per year, compared
with 7.1% for consumer expenditure. Modernization of the Indian retail sector will
be reflected in rapid growth in sales of supermarkets, departmental stores and
hypermarkets.
Sales from these large - format stores are to expand at growth rates
ranging from 24% to 49% per year during 2003-2008, according to a latest report
by Euromonitor International, a leading provider of global consumer-market
intelligence. The country has the highest per capita outlets in the world - 5.5
outlets per 1000 population. Around 7% of the population in India is engaged in
retailing, as compared to 20% in the USA.
In a developing country like India, a large chunk of consumer expenditure
is on basic necessities, especially food-related items. Hence, it is not surprising
that food, beverages and tobacco accounted for as much as 71% of retail sales
in 2002. The share of food related items had, however, declined over the review
period, down from 73% in 1999. This is not unexpected, because with income
growth, Indians, like consumers elsewhere, have started spending more on nonfood items compared with food products. Sales through supermarkets and
department stores are small compared with overall retail sales.
Nevertheless, their sales have grown much more rapidly, at almost a triple
rate (about 30% per year during the review period). This high acceleration in
sales through modern retail formats is expected to continue during the next few
years, with the rapid growth in numbers of such outlets due to consumer demand
and business potential.
India's vast middle class and its almost untapped retail industry are
key attractions for global retail giants wanting to enter newer markets. The GDP
is at an all time high and income levels shooting through the roof, the average
Indian consumer has never had it so good. The propensity to consume has
reached peaks that had never been scaled before. Credit cards are flashed with
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disdain and shopping baskets are getting bigger all the time. Here are some
factors that indicate the potential of retail in India:

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At 271 million, one of the largest consuming base in the world,

forming 27% of the total population.

A high spending community below 45 years comprises 81% of the

population.

A young population with 54% population below 25 years.

Increased literacy from 44% in 1965 to 70% in 2003.

Increase in workingwomen from 1.3 million in 1961 to 4.8 million in 1998.

Increase in media penetration to 38 million cable

household and

80

million TV household in 2001.

Rising incomes and improvements in infrastructure are enlarging

consumer markets and accelerating the convergence of consumer tastes.

Looking at income classification, the National Council of Applied Economic

Research (NCAER) classified approximately 50% of the Indian population
as low income in 1994 - 95; this is expected to decline to 17.8% by 200607.

Liberalization of the Indian economy which has led to the opening up of

the market for consumer goods has helped the MNC brands like Kellogs,
Unilever, Nestle, etc. to make significant inroads into the vast consumer
market by offering a wide range of choices to the Indian consumers.

Shift in consumer demand to foreign brands like McDonalds, Sony,

Panasonic, etc.

The internet revolution is making the Indian consumer more accessible to

the growing influences of domestic and foreign retail chains. Reach of

satellite T.V. channels is helping in creating awareness about global

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products for local markets. About 47% of Indias population is under the
age of 20; and this will increase to 55% by 2015. This young population,
which is technology-savvy, watch more than 50 TV satellite channels, and
display the highest propensity to spend, will immensely contribute to the
growth of the retail sector in the country. As India continues to get strongly

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integrated with the world economy riding the waves of globalization, the retail
sector is bound to take big leaps in the years to come.
But the flip side of the coin is that the average size of each of the retail
outlets in India is only 50 square feet, and though a large employer, the industry
is very unorganized, fragmented and with a rural bias.
2.2 Classification of the Indian Retail Sector:
1) FOOD RETAILERS
a) Food Retailers:
There are large number and variety of retailers in the food-retailing sector.
Traditional types of retailers, who operate small single-outlet businesses mainly
using family labour, dominate this sector .In comparison, super markets account
for a small proportion of food sales in India. However the growth rate of super
market sales has being significant in recent years because greater numbers of
higher income Indians prefer to shop at super markets due to higher standards of
hygiene and attractive ambience.
2) NON FOOD RETAILERS
b) Health & Beauty Products:
With growth in income levels, Indians have started spending more on
health and beauty products .Here also small, single-outlet retailers dominate the
market .However in recent years, a few retail chains specializing in these
products have come into the market. Although these retail chains account for
only a small share of the total market , their business is expected to grow
significantly in the future due to the growing quality consciousness of buyers for
these products .
c) Clothing & Footwear:
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Numerous clothing and footwear shops in shopping centers and markets

operate all over India. Traditional outlets stock a limited range of cheap and
popular items; in contrast, modern clothing and footwear stores have modern
products and attractive displays to lure customers. However, with rapid
urbanization, and changing patterns of consumer tastes and preferences, it is
unlikely that the traditional outlets will survive the test of time.

d) Home Furniture & Household Goods:

Small retailers again dominate this sector. Despite the large size of this
market, very few large and modern retailers have established specialized stores
for these products. However there is considerable potential for the entry or
expansion of specialized retail chains in the country.
e) Durable Goods:
The Indian durable goods sector has seen the entry of a large number of
foreign companies during the post liberalization period. A greater variety of
consumer electronic items and household appliances became available to the
Indian customer. Intense competition among companies to sell their brands
provided a strong impetus to the growth for retailers doing business in this sector.
f) Leisure & Personal Goods:
Increasing household incomes due to better economic opportunities have
encouraged consumer expenditure on leisure and personal goods in the country.
There are specialized retailers for each category of products (books, music
products, etc.) in this sector. Another prominent feature of this sector is popularity
of franchising agreements between established manufacturers and retailers.

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2.2.1 The growth of Food & Non-Food retailers in India:

2.3 Features of the Indian Retail Sector:

1) Unorganized:
There are nearly twelve million retail outlets in India and the number is
growing. Two thirds of these stores are in rural location. The vast majority of the
twelve million stores are small "father and son" outlets. According to the Retailing
in India report published by the PwC Global Retail Intelligence Program , share of
the unorganized sector is 98%.
2) Fragmented:
Retail stores in India are mostly small individually owned
businesses. The average size of an outlet is 50 s.q. ft. And, though India has the
highest number of retail outlets per capita in the world, the retail space per capita
at 2 s.q. ft per person is amongst the lowest in the world.
3) Rural bias:
Nearly two thirds of the stores are located in rural areas. The retail
industry in rural India has typically two of the forms: "Haats" and "melas". Haats
are the weekly markets: they serve groups of 10-50 villages and sell day-to-day
necessities. They are frequently used as replenishment point for the small village
retailer. Melas are larger in size and more sophisticated in terms of the goods
sold. Mela merchandise would include more complex manufactured products
such as televisions.
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2.4 Evolution of the Indian Retail Sector:

Evolution of Indian Retail:
Historic/
Rural Reach

Traditional/
Pervasive Reach

Government
Supported

Modern Formats/
International

Exclusive Brand
Outlets
Hyper/Super Markets
Department Stores
Shopping Malls

PDS Outlets
Khadi Stores
Cooperatives
Convenience Stores
Mom and
Pop/Kiranas
Weekly Markets
Village Fairs
Melas
Source of
Entertainment

Neighborhood
Stores/Convenience

Availability/ Low
Costs /
Distribution

Shopping
Experience/
Efficiency

From the above diagrammatic representation of the evolution of the Indian

retail sector it is evident how each retail format has evolved and gained
importance in its own way. The arrows above show how the retail format evolved
i.e. through government aid or just by the need of it. The arrow below the boxes
represents the utility and features of the retail formats. The boxes represent the
various retail formats that have evolved.

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3. STRUCTURE OF THE INDIAN RETAIL SECTOR

India, with close to 12 million outlets, has the highest retail outlet density in
the world. This retail sector is divided into two formats:
3.1 Traditional Formats:
This format is prevalent in the rural parts of the country. They mainly
include the unorganized forms of retailing, because of which they have low
productivity. These formats have emerged largely due to the absence of
alternative employment and typically require employees with very low skills.
However, they are very important as they account for two thirds of the sectors
output. There are mainly four formats under the traditional form:
1) Rural Counter Stores:
Indian retail is dominated by family run counter (kirana) stores that
stock a range of branded/unbranded items. Rural counter stores are multi
purpose stores and sell items of essential need, both food and non food. These
stores are often located in rural homes and serve to supplement the familys
income from agriculture.
2) Kiosks:
These small, pavement stalls stock a limited range of food and beverage
items. Kiosks are convenient for impulse or emergency purchases and are
located in busy commercial and market areas. E.g. Paan shops.
3) Street markets:
Held at fixed centers in urban and rural areas on a daily or weekly basis,
street markets comprise multiple stalls (often more than 200) selling a wide range
of food and non food products. These markets compete on both variety and
price, and also sell counterfeit goods and smuggled items. Street markets have
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traditionally acted as a place for social gathering. The bazaars in Poland and
open air wholesale markets in Russia are the foreign equivalents of this format.
E.g. Village Haats.
4) Street Vendors:
These are mobile retailers, providing perishable food items (milk, eggs,
vegetables, fruit, etc.) at the customers doorstep. While their prices are higher
than alternative retail channels, they compete on convenience.
3.2 Modern Format:
Indias retail environment has changed in the last 6 7 yrs and it has
become more organized which is now known as the modern retail format. There
have been changes both on the demand and the supply front. On the demand
front, customers have begun spending more as incomes rise and brand
consciousness increases. Consumer research shows that households in
metropolitan cities are gravitating towards supermarkets and other modern retail
channels. On the supply front, a number of organized retailers have entered the
trade in the last 5 years. The entry of MNCs into retailing has driven the growth
of specialty chains and upgraded the standards of existing multi brand outlets.
Some of the modern retail formats coming up in India are listed below:
1) Supermarkets/ Hypermarkets:
These are large (20,000 sq. ft plus) self service stores selling a variety of
products at discounted prices. The best practice chains in this format are
Carrefour (France), Wal-Mart (US), Kroger (US), Tesco (UK) and Metro
(Germany). Supermarkets tend to be located in key residential markets and
malls, and offer competitive prices due to economies of scale in logistics and
purchasing. This format is new to India and only three supermarket chains of
note exist Foodworld, Nilgiris and Subhiksha. Indian supermarkets are smaller
than those in other countries, with fewer cash registers and sizes that are at least
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a fifth of the global players selling area (3,000 4,000 sq. ft. vs. 20,000 25,000
sq. ft.).
2) Department Stores:
These large stores primarily retail non food items such as apparel,
footwear and household products. They stock multiple brands across product
categories, though some of them focus on their own store label (e.g. Marks &
Spencers St. Michael). Department stores are found on high streets and as
anchors of shopping malls. Several local department store chains have opened
shop in India in the past 5 yrs. e.g. Shoppers Stop, Westside, Globus, Ebony,
etc.
3) Specialty Chains:
These retail outlets focus on a particular brand or product category,
usually non food items, and are located on high street and shopping malls.
Most of the specialty chains compete on service. E.g. Gap, Levis, Benetton, etc.
This format has seen highest levels of adoption in India, with several chains
establishing a strong presence, typically through franchising, e.g. Lacoste and
Benetton, Levis, Bata, etc.
4) Urban Counter Stores:
These small family run stores dominate food and non food retailing and
are found in both residential and commercial markets in towns and cities. The
food stores stock a wide range of branded and unbranded food items. They
typically have a loyal clientele bound to them by personal relationships and the
convenience of credit and home delivery. Non food counter stores typically
stock multiple local brands.
Due to emerging growth in the retails sector of India, the existing retail
sector is experimenting with new formats for the betterment of the consumers
and to meet up with the global competition. The following table shows the same:
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3.2.1 Changing Formats of Retailing:

Retailer

Current Format

New Formats Experimenting With

Shoppers Stop

Department Store

Quasi-mall

Ebony

Department Store

Quasi-mall, smaller outlets, adding food

retail

Crossword

Large bookstore

Corner shops

Piramyd

Department Store

Quasi-mall, food retail

Pantaloon

Own brand store

Hypermarket

Subhiksha

Supermarket

Considering moving to self service

Vitan

Supermarket

Suburban discount store

Foodworld

Food supermarket

Hypermarket, Foodworld express

Globus

Department Store

Small fashion stores

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4. PRODUCTIVITY PERFORMANCE
Productivity of the retail sector is low at present, largely because of the
very low penetration (only 2%) of modern formats like supermarkets and
hypermarkets. These formats not only raise the productivity of the retail sector,
they also drive the restructuring of the upstream supply chain leading to the
rapid development of sectors like food processing. The labour productivity of
retail in India is low at 6 per cent of US levels. This figure is 5 per cent for food
retailing and 8 per cent for non - food retailing. In comparison, productivity of food
retailing in Brazil is 14 per cent and of non-food retailing in Poland is 25 per cent.
The productivity performance of retail sector has been divided into two parts food
retail and non food retail.
4.1 Performance:
1) Food Retailing Productivity:
Supermarkets and convenience stores account for less than 1 per cent of
employment and are at 20 per cent of US productivity. This is much lower than their
potential of 90 per cent. Only the best practice Indian player has a productivity of 53
per cent of US levels, which is almost three times the Indian average
Traditional formats, especially street markets and vendors, are a significant
drag on productivity. They account for 50 per cent of the labour hours spent in retail
and are at 3-4 per cent of US productivity. This is similar to Brazil, where modern
formats are at 48 per cent of US levels, but the much lower productivity of street
bazaars and vendors reduces the industry average to 14 per cent.
2) Non - Food Retailing Productivity:
Modern formats display low productivity compared to US levels but they are
slightly higher than that of the traditional formats.

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Department stores, specialty chains and upscale multi-brands employ a

mere 2.5 per cent of total non-food retail employment and average 24 per cent of US

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productivity. The specialty store average is 24 per cent versus 123 per cent in the US.
The best Indian specialty chain stands at 53 per cent. Department stores and upscale
multi-brand stores perform at 16 per cent of US levels. Urban counter stores are at 8
per cent and employ around 68 per cent of the total non-food retail employment.
Traditional formats account for around 30 per cent of non-food retail
employment and are at 6 per cent of US productivity.
4.2 Reasons for Low Productivity:
A large productivity gap exists in retail - 95 per cent in the case of food retailing
and 91 per cent for non-food retail. This is driven by two factors - a format mix that is
heavily skewed towards transition formats, and poor productivity of modern formats.
The major reasons for this low productivity are as follows:
1) Unfavourable format mix:
Channels such as supermarkets, department stores and specialty chains
account for only 2 per cent of retail output. This leads to lower overall/sector
productivity, as counter stores are 2-3 times less productive. Supermarkets and
specialty chains are more productive than counter stores for two reasons - they
leverage their volumes to drive costs down and possess superior skills. The larger
volumes or scale of modem retailers make it possible for them to bargain for lower
unit costs not only while procuring, but also while distributing and marketing. In
addition, supermarkets and specialty stores possess strong skills supported by
technology in the front end (i.e., merchandising and marketing) as well as in the back
end (i.e., managing the supply chain and inventory).
A key reason why supermarkets have not grown share rapidly, especially in
food retail, is the underdeveloped nature of upstream industries. The relatively higher
price proposition of supermarkets versus counter stores will be a key determinant of
the sector's evolution. Currently, supermarkets are not able to capture the benefits of
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larger scale due to a fragmented supply chain and a sub-scale processing sector.
They
are also penalized by the current operating environment, which favours counter stores
(e.g., tax and labour laws). Consequently, prices in Indian supermarkets are slightly
higher than those of counter stores - a quick survey in Delhi indicated that
supermarkets were 2-3 per cent more expensive for a set of branded FMCG products
- while in other countries, supermarkets are about 10 per cent cheaper than counter
stores. As large food retailers in India begin passing on the benefits of better
purchasing to customers in the form of lower prices, they will be able to capture share
more rapidly.
2) Poor Productivity in Modern Formats:
There exists a productivity gap for two key food formats - supermarkets and
counter stores. India has made upward adjustments in the productivity of
supermarkets to account for the differences in their upstream environment vis--vis
that enjoyed by large food retailers in the US. Supermarkets in India experience a
productivity penalty due to:

The fragmented and inefficient supply chain that raises the cost of
procurement; and

The need to maintain competitive price levels vis--vis cheaper counter stores.
This leads to a lower level of value add when compared with firms such as Wal-

Mart, which source directly from processors. The supply chain for food in India (for
both branded and unbranded goods) has two to three more intermediaries on an
average, compared with similar chains in more developed markets. This is because of
market regulations (constraints on food grain movement across states, inability to
purchase directly from farmers, etc.), regulations that slow down the growth of large
processors and the fragmented nature of retail.
A] Supermarkets:
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An inefficient organization of functions and tasks, poor merchandising and

marketing skills, low scale of operations and poor supplier relations account for the
bulk of the 83 % point gap in supermarket productivity between India and the US.

Organisation of functions and tasks (OFT):

Most Indian supermarkets can double their productivity by improving the

organisation of tasks and rationalising the workforce. The average supermarket in India
has many more employees than a US supermarket due to the limited use of multitasking and part-time help to meet peak hour needs as well as non-standard layouts
that reduce efficiency. In contrast, India's best practice supermarket ensures that its
sales personnel play multi-faceted roles and undergo in-house training prior to joining.
A quarter of the sales staff works only part-time, putting in 4-6 hours a day during peak
shopping hours. The supermarket also has a scientifically designed layout that it tries
to adhere to across the chain. Consequently, this chain has a much lower productivity
penalty of 7 percentage points compared to average supermarkets which have a
productivity penalty of 20 percentage points

Merchandising and marketing:

Poor merchandising and marketing skills and absence of private labels among

Indian supermarkets have led to lower sales per store and account for 27 percentage
points of the productivity gap.
a) Skills: Indian supermarkets do not focus on systematically understanding the
purchasing patterns of consumers to determine the products to stock and the targeted
promotions to undertake. The same applies to factors such as store layouts and
ambience. A couple of players have begun to address this issue by defining clear
strategies for pricing as well as building customer traffic and loyalty. For instance, a
Chennai-based supermarket chain offers a price discount of 8-9 per cent on an
average and seeks to keep its regular customers informed of good buys through
fortnightly newsletters.

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b) Private label/product mix: A second aspect of merchandising and marketing is

the share of revenues from private labels. Supermarket chains in the US enjoy a larger
share of sales from private/store labels that earn them higher margins. This factor,
plus a product and sales mix skewed towards higher value items, earns them 3-4 per
cent higher margins. Building a strong private label should be a key priority for

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supermarkets in India. Groceries, fresh fruit and vegetables and ready-to-eat items are
the focus segments for this, and a couple of players are planning to set up kitchens to
cater to this demand. Doing this should further improve productivity performance by
4%.

Scale:
Supermarkets in India currently have a low scale of operations both in terms of

number of stores and size per store. The larger supermarket chains in India have 30 40 stores compared to the 1,000-store average observed in the US. Supermarkets in
the US are also much larger than their counterparts in India. Higher scale makes it
possible for retailers to use fixed labour (such as purchasing, marketing and
administration) more expediently as well as use their bargaining power to buy cheaper
and rationalise logistics upstream.

Supplier relations:
Sourcing from multiple sub-scale suppliers is a key issue for supermarkets in

India, and explains about 10 percentage points of the productivity gap versus the US.
a) Lack of strategic purchasing: Large food retailers in India can lower costs by
rationalising the vendor base, and undertaking strategic collaborations with processors
and FMCG companies. Supermarkets in India procure from a large number of
vendors, across regions. For instance, the best practice player has 1,600-1,700
vendors - over 400 per region. As a consequence, a retailer needs a large sourcing
and quality control team, which raises the costs of procurement. Focusing on fewer
national suppliers wherever possible can reduce the sourcing complexity, which will
also help meet the cost/quality needs. McDonald's in India is a good example of best
practice in supply chain management. The company works with one carefully selected
vendor per item, sets quality and cost targets and helps the vendor upgrade
operations systematically.

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Supermarkets can also lower costs or increase value by entering into strategic
deals with upstream players. These initiatives include collaborating with food
processors in purchasing as well as manufacturing private label goods, and
engineering strategic relationships with branded goods companies aimed at increasing
sales and reducing distribution costs (benefit shared by both parties). This is already
beginning to happen. For instance, a supermarket chain purchases wheat along with
an atta company to lower costs, and has succeeded in entering marketing/ promotional
deals with several branded goods players.
b) Limited adoption of best practices by upstream players: Food processors in
India are typically small and unorganised. The business systems of these processors
as well as of the large FMCG companies are not configured to meet the needs of large
retailers. This imposes a penalty on retailers, adding costs and forcing them to engage
in additional non-core activities. For instance, most local processors as well as some
national and multinational food manufacturers do not bar code their products. As this
is essential for supermarkets, which use scanning equipment for billing, it becomes
necessary for the retailers to undertake this activity, adding to their costs.
c) Inability to meet delivery schedules: Manufacturers are unable to meet the full
delivery requirements of large retailers, which leads to stock-outs in stores (as
retailers operate on a "just in time" basis). This occurs because the manufacturers
also service larger buyers such as supermarket chains through their existing, multilayered, distribution channel where product shortages and delays are frequent. This
should change as organised retailers form an increasing share of FMCG company
revenues.

Low demand/income:
Lower income levels and, hence, lower consumption among Indian

customers limit the size of average purchases, leading to lower productivity at the
cashier.

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B] Urban Counter Stores:

Urban counter stores in India are five times less productive than US mom-and-pop
stores. This difference can be attributed to the following factors:

OFT:
Indian counter stores do not use part-time labour and multitasking, which would

help them double productivity.

Merchandising and marketing:

Counter stores in India lack the skills to better align stocking patterns and
promotions to consumer needs. In addition, they have not faced the sort of
competitive pressure that would force them to raise their standards. In other
countries, to survive competition from supermarkets, counter stores have opted to
focus on product or service niches. For instance, in France, gourmet cheese
stores and farm-fresh vegetable stores thrive in the vicinity of supermarkets. In
New York, Korean grocery stores stay open all 24 hours to provide added
convenience to customers. In India, we see early signs in Chennai, where
competition from supermarkets is the highest (17 per cent of sales) and larger
counter stores have begun stocking imported or non-food items to differentiate
their merchandise from supermarkets.

Supplier relations:
Counter stores can increase productivity by 4-5 percentage points by buying

more strategically and benefit from the simplification of the supply chain brought about
by the entry of large retailers and food processors. Buying in bulk and availing of cash
discounts can help improve margins.

Capital intensity:
The service proposition of counter stores in India involves a much higher

consumption of labour hours than a mom-and-pop in the US. This is because an

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Indian counter store does much more in-store customer handling and home deliveries
than a US mom and - pop store, which focuses on providing a clean environment for
self-service. The key reasons for this difference are the low labour costs in India, the
small size of the stores and the sale of products such as loose grains and oil that do
not lend themselves to self-service.

Scale and low-income:

The low entry barriers for counter stores, combined with low income levels,

leads to low capacity utilisation. Entry into retail for small players is relatively easy licensing is not an issue, product sourcing is not restricted, labour is easily accessible
and residential property can be used as the store. This phenomenon, however, does
not affect supermarkets for which there is still latent demand.

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5. PROBLEMS FACED BY THE RETAIL SECTOR

Competitive behaviour in Indian retail is characterised by lack of exposure to
best practice skills as well as an implicit subsidy for counter stores through differential
enforcement of laws. In addition, despite a large number of players, we see an
absence of price-based competition. Minimal high-quality competition and absence of
skills have led to a lack of pressure to perform - resulting in low and relatively stagnant
productivity levels compared to the potential. This is due to some factors prevalent in
the internal and the external environment affecting the retail industry.
5.1 Internal factors:

1) Low domestic competition:

Low competition has contributed to low productivity and lower quality of service.

Food retailing: Competition among stores is limited because each

counter store typically has an established clientele based on personal
relationships and, often, credit. This situation is aggravated by a lack of
competitive pressure from modern formats.

Non-food retailing: On the non-food side too, competition among retailers is

moderate. Price is frequently used as a tool to increase sales, with even small
stand-alone shops beginning to advertise locally. In this segment, the
customer's ties to a particular retailer are weaker due to lower frequency of
interaction. There is also greater organised competition in non-food retailing from branded specialty chains - that is reflected in its superior productivity
performance compared to food.

2) Lack of exposure to best practice:

Competition in Indian retail is almost entirely domestic, and exposure to global
best practice retailers is negligible. On the food side, only one foreign retailer -Dairy
Farm - is present in India through a joint venture with a local player. However, none of
the world's top 10 food retailers is present. On the non-food side, we have seen the
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entry of specialty chain stores such as Benetton, Nike, Reebok and Lacoste. The large
discounters, category killers and best practice department stores (Toys 'R' Us, Circuit
City, Macy's, etc) are absent.
The absence of best practice skills is critical, given the complexity of
successfully managing a retail business. Retailers need expertise to manage back-end
activities such as sourcing and inventory management, as well as the front-end
functions of merchandising, promotions and customer service. The complexity arises
when retailers need to manage a large number of SKUs and suppliers, as well as
ensure no stock-outs while maintaining low inventory levels. The issue of skills is
particularly relevant for India, as the majority of large format retailers have no prior
experience in the industry.
Consequently, it is likely that in the absence of best practice experienced
players, the retail transition will take a long time as players lacking skills and
experience are less willing to take risks and will, therefore, take longer to ramp up
operations. In fact this is already happening, with retailers opting for less investmentintensive and, therefore, less risky propositions.
3) Non Level playing field issues:

Counter stores in India have several advantages vis--vis large chain

retailers. This is due to differential implementation of laws (labour, taxation) and
differential access to resources (both availability and price of real estate and
labour, in particular). These factors have inhibited the entry as well as expansion of
modern retailers. We discuss these issues in greater depth in the next section.
5.2 External Factors:
Low productivity in the retail sector has been driven by restrictions on FDI,
underdeveloped upstream industries, non-level playing field issues, the supply and
cost of real estate, and India's low per capita income. Productivity has also been
affected by secondary factors such as a rudimentary urban infrastructure, red - tapism
and varied customer preferences.
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1) Restrictions on foreign direct investment (FDI):

FDI has been a key contributor to the rapid evolution of retail in other
developing economies such as Thailand, Poland and China. In Thailand, seven of the
top 10 retailers enjoy foreign equity and the list includes names such as Makro,
Carrefour and 7-Eleven. Modern formats made their appearance in Poland and China
in the '90s primarily because of the entry of global chains. Global retailers, with the
benefit of their experience, can rapidly expand operations and tailor successful
formats to the local environment.
In India, FDI is not permitted in pure retailing though MNC retailers can
participate in wholesale trade as well as operate retail businesses through local
franchisees (Benetton, Reebok, Lacoste). This impacts food retailing more, as
franchising is tougher to manage in this segment given the bigger formats and larger
number of SKUs that complicate sourcing and merchandising. In addition, the
requirements of customer service in this segment are higher- need to manage
perishable products, frequent promotions- and demand expertise of nature most
Indian players have yet to acquire. Dairy Farm is the only foreign food retailer present
in India and was permitted entry during a regulatory window (1993-95).
2) Underdeveloped upstream:
The absence of well-developed upstream industries (e.g., processing and
distribution logistics) raises retailing costs by 4-5 per cent. This, in turn, has been due
to the reservation of large parts of food processing and garment manufacture for the
small scale in the past, which has also hindered the development of support
industries.

Food: Here, two key problems exist-lack of large-scale processors and the
poor quality of distribution infrastructure.
Large, organised players account for only 25 per cent of the food processing

output in India. The small-scale industry (SSI) accounts for 33 per cent of the output
while the unorganised, traditional manufacturers produce the remaining 42 per cent.
While SSI reservation has been progressively relaxed, some products remain restricted
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(including bread, confectionery, etc.,) and the legacy effect is strong. Food processors
are, therefore, not able to reap the benefits of scale (cost) or invest in brand building.
Also, food processors are absent in key segments such as fruit and vegetables and
dry groceries.
Distribution of most food items involves multiple intermediaries, high cycle times
and wastage during transportation and storage. The distribution infrastructure is the
weakest in the fruit and vegetables chain, where the absence of a cold chain and
convenient marketing channels leads to huge wastage. Also, the number of brands/
products available is limited. As a result, retailers need to deal with multiple, small
vendors and undertake some non-core activities (such as cleaning groceries and bar
coding products).
Global food retailers perceive India's underdeveloped supply chain as a critical
barrier. They will not invest in India unless they can source a large portion of their
requirements locally at the right quality. This is essential if they are to reap economies
of scale and leverage their merchandising skills. For example, in China, Carrefour now
has 22 hypermarkets after just 4 years of operations, and sources 90 per cent of its
goods locally.

Non - food: On the non-food side, large segments of domestic apparel and
shoe manufacturing are reserved for small-scale manufacturers.
Consequently, product sourcing becomes difficult for retailers of branded

goods and own store labels, who have to deal with issues such as poor quality, low
volumes and higher costs. Large formats such as department stores find it difficult to
source sufficient brands to stock, as well as quality merchandise for their store labels.
3) Non Level playing field issues:
Tax and labour law advantages give counter stores a benefit (lower costs) of
3-4 per cent of sales, which translates into a 15-20 per cent benefit in gross margins.
The advantages stem from four factors:

Differential tax payments: These arise due to higher tax rates for organised

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retailers as well as tax evasion by counter stores. Income tax rates differ for the two
formats - large retail chains are taxed at the corporate rate and need to pay 38.5 per
cent of their income as tax, while lower individual income tax rates are applied to the
counter stores. Also, we find that most counter store operators do not pay income tax
at all, and sometimes even evade sales tax. The non-enforcement of laws applies in
other situations as well, such as in the control over the sale of counterfeit products
and adherence to labour laws (discussed in the next section).

Varying tax rates across states: In addition to the benefits accruing to

counter stores from non-enforcement of laws, the existing tax structure actually
imposes a penalty on retail chains operating in multiple areas. The current sales tax
structure is characterised by differences in rates across states plus the imposition of
an additional central levy on interstate sales. On top of this, a tax (octroi) is levied on
the movement of goods from one district to another. This practice negatively impacts
retail chains, as a higher proportion of their merchandise is sourced from outside the
state of operation.

Differential enforcement of labour laws: Labour laws in India limit the hours

of work for a retail employee to eight hours, require that a shop be closed one day a
week and suggest the minimum wages to be paid.
Organised retailers typically adhere to these norms, while counter stores are open
almost throughout the year with an average working day per employee amounting to
12-13 hours.

Non-payment of market rates for inputs: A critical cost advantage for

counter stores arises from the fact that they typically pay lower rates for key inputs
(i.e., land and utilities) than do supermarkets. Counter store operators either own the
premises in which they operate or pay a nominal rent (set years earlier) that is far
lower than the actual market value of the property. Most counter stores also save on

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power costs, paying residential rates that are nearly half the commercial rates paid by
modern retail chains.
4) Supply & Cost of real estate:
This factor severely restricts the spread of the large, modern retail formats.
Location is a key factor in deciding a retail outlet's success. In India, retailers find it
difficult to acquire land of the right size at the right location, particularly in the large
cities. This explains why many of the early entrants into retailing have been real estate
players (Shoppers Stop, Globus) or players with access to property (Foodworld,
Crossroads). Real estate issues impact larger formats more, which explains the slow
growth of department store and malls relative to specialty chains.
Several issues distort the real estate market - laws heavily skewed
towards tenants, restrictive zoning legislation, non-availability of governmentowned land combined with fragmented ownership of privately held property, and
disorganised transactions due to a lack of clear titles and transparency.

Pro - tenant laws: In the past, rent laws have favoured tenants, making

owners wary of renting out their property. It is difficult to recover rented properties from
tenants or to increase rents, and land disputes stay pending in courts for years. The
limited commercial land that is available is taken by counter store operators, who have
been in the trade for generations and often lack alternative occupations (therefore
limiting supply into the market).

Zoning laws: Zoning laws restrict the supply of real estate as well as attach

constraints to property development for retail. In the master plans of most cities, land
is clearly demarcated for various purposes - agricultural, industrial, residential and
commercial - and it is extremely difficult to convert land earmarked for other purposes
to retail/commercial use. However, zoning laws vary by state. So, while land
conversions for commercial use are nearly impossible in Delhi, the governments in
some southern states are more flexible.

Non-availability of government land, combined with fragmented

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private holdings: These factors make it difficult for retailers to acquire large plots of
land both within the city and in the suburbs. The local authorities typically own large
tracts of vacant land both in city centres and in the suburbs, and auction this land in
lots only at infrequent intervals. This constrains supply and pushes up real estate
prices. Meanwhile, private holdings are typically small, due to which real estate
developers need to consolidate land owned by multiple individuals, which is an
arduous task. In the suburbs, the absence of infrastructure further reduces the land
available that can be used for commercial use.

Lack of transparency: The real estate market in India is extremely

disorganised and is marked by a lack of information on prices and clearly

established ownership titles. Since information about this market is disaggregated, i.e.,
with individual brokers, even similar, adjacent plots often command different rentals.
Jointly-held properties and complex sub-letting arrangements further complicate
ownership rights. Finally, high property taxes drive owners to demand a significant
part of the payment in cash and without records. All these factors make access to real
estate for organised players a complex task.
Real estate availability's impact on the development of retail can be judged
from the experience of South India. A key stimulus for the retail boom in Chennai and
Bangalore has been their lower property costs when compared to cities like Mumbai
and Delhi.
5) Low Income:
India's per capita income is 6 per cent of US levels at purchasing power
parity, leading to low consumption. On the input side, cash costs are low given that
counter stores are typically family run (with some hired help), and family labour is
either not assigned any value or lacks alternative occupations. This will change as
alternative employment opportunities emerge with economic growth and education.
Insufficient demand is likely to hold back the establishment of modern retail
formats in rural areas. Currently, rural needs are met through small, general-purpose
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village stores and weekly street markets (haats). These haats are extremely low-cost
formats catering to the requirements of about 15 villages and providing a variety of
goods and services - from food grains to entertainment. A hypermarket/supermarket
would the daily sales potential from this catchment area to be low, and catering to a
larger radius difficult, given the connectivity problems. In addition to low demand,
modern formats would also find sourcing difficult as a large share of local
merchandise
(brands plus counterfeits) is consumed in rural areas. Finally, competing with the
social/entertainment proposition of the existing channel would be tough.
6) Poor Urban Infrastructure:
Most Indian cities suffer from bad roads, poor transport and face power
and water shortage. This impacts the growth of suburban shopping options negatively,
making it difficult for retail developments to come up and for consumers to get there
conveniently. This factor is already important in cities such as Delhi and Mumbai
where real estate costs in the city centre are prohibitive (causing a move to the
suburbs). In fact, retail developers find that they have to invest in constructing
approach roads and arranging for their own water supply, often without support from
the local government. This trend is likely to spread to other urban centres as well.
The inadequate levels of urban infrastructure can be attributed to bankrupt
local governments. The majority of municipal agencies in the country have limited
funds to invest in infrastructure. Collections from property taxes and user charges,
that are typically used to finance infrastructure, are low. In fact, most municipalities
depend on the state government for 50-60 per cent of their expenditure.
7) Bureaucracy/Legislation:
Retail operations need to obtain multiple licences and permits, ranging
from a basic trading licence to product specific licences to pollution clearances. Each
individual retail outlet has to acquire these, even if it is part of a chain. These factors
are irritants, and add time and cost to the process of establishing a retail chain. For
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e.g. A chain store requires 12 licenses before it actually commences with its
operations.
8) Customer preferences:
Given India's size and the presence of diverse cultures, there are
significant regional variations in product preferences. This tends to complicate
sourcing. In addition, customers perceive modern formats as more expensive than the
traditional formats, especially in food retailing.
9) Factors affecting output:
Some of the productivity barriers such as restrictions on FDI,
unavailability of appropriate real estate and low income also affect output by slowing
down the expansion of existing modern players and hampering the entry of new ones.
Output is also affected by capital market barriers. Retail being a complicated business
has implications on the availability of funds through nationalised banks (the bulk of
supply). Lack of expertise on the part on banks in understanding the retail business
leads to their shying away from lending to this business or else lending at a higher
rate of interest.

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Section 2: Impact of FDI

6. INTRODUCTION TO FDI
6.1 Overview:
The year 1991 marks a new growth phase of FDI in India with an all time
high flow of FDI. Following the Industrial Policy (1991), a large number of foreign
companies from different parts of the world rushed into India. In this period, in
addition to thousands of foreign collaborations in India, as many as 145 foreign
companies registered in India within a span of 10 years from 1991-2000.
Companies like General Motors, Ford Motors, and IBM that divested from India in
the 1950s and 1970s re-entered India during this period. A large number of Asian
companies like Daewoo Motors, Hyundai Motors and LG Electronics from S.
Korea, Matsushita Television and Honda Motors from Japan invested in India
during this period.
The Government of India faced severe foreign exchange crisis by 1990
and its foreign exchange reserve had reached an unsustainable level.
International Monetary Fund (IMF) and World Bank agreed to provide loans to
India on the conditions that India will make major changes to liberalize trade and
investments in India. The domestic pressure to meet the imports of essential
commodities and the external pressure to liberalize Indian market forced the
Government of India to accelerate the liberalization process in India. With the
legislation of the Industrial Licensing Policy, 1991, industrial licensing was
abolished except for 18 industries. FDI up to 51% equity was allowed in 34
formerly high priority industries and the concept of phased manufacturing
requirement on foreign companies was removed. Further, the tariffs on imports
have been steadily reduced in every budget since 1991.
Subsequently, GOI replaced FERA, 1973 that regulated all foreign
exchange transactions with Foreign Exchange Management Act (FEMA),
199918. The objectives of FEMA have been to facilitate external trade and
payments and to promote orderly development and maintenance of foreign
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exchange market. But for sectors like banking, civil aviation, petroleum, real
estate, venture capital funds, infrastructure, service sector, atomic energy,
defence, agriculture and plantation, print media, broadcasting and postal
services, automatic approval of FDI were allowed in all other sectors during this
period.
The total number of foreign collaborations increased from 976 in the year
1991 to 2144 in the year 2000. Similarly, the amount of FDI increased from 5156
million INR to 3,73,722 million INR during this period. It is also observed that
there has been a significant shift in the share of FDI from different countries that
have been investing in India. The share of FDI from the United Kingdom reduced
to almost 10% and the share of FDI from UK & USA also decreased during this
period. Interestingly the share of other countries including S. Korea, Malaysia,
Australia, and countries from Asia and European Union increased to over 65% of
the total FDI during this period.
In a period of about 40 years since the British left India, USA has gained
more control of the Indian economy through direct investments of American
companies in India. Owing to the poor balance of payment position in 1990, India
had to seek loan from the International Monetary Fund (IMF) that is largely
controlled by USA. IMF used this opportunity to force India to liberalize its
economy so that foreign companies could have more & easy access to the Indian
economy and market. In the recent decade, however, companies from many
other countries have increased their share of direct investments in India.
In summary, the poor balance of payment position of India and pressure of
IMF and World Bank to liberalize the Indian economy forced the Government of
India to accelerate the pace of liberalization process in India since 1991. While
the shares of FDI from traditionally dominant countries like the U.K. and the USA
have fallen, the shares of FDI from other countries including the countries from
Asia and the European Union have increased from 53% in 1991 to 86% in 2000.
The power equation of U.K., USA, Japan and other European countries with
India had changed by the end of this period.
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Foreign Direct Investment (FDI) has been recognized as one of the

important drivers of the economic growth of our country. Government has,
therefore, been making all efforts to invite and facilitate FDI and investment from
Non Resident to complement and supplement domestic investment.
Foreign direct investment is freely allowed in all sectors including the
services sector, except a few sectors where the existing and notified sectoral
policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities
can be brought in through the Automatic route under powers delegated to the
Reserve Bank of India (RBI), and for the remaining items/activities through
Government

approval.

Government

approvals

are

accorded

on

the

recommendation of the Foreign Investment Promotion Board (FIPB).

6.2 Policy and Procedures:
6.2.1 Permission:
1) Foreign Direct Investment (FDI) is permitted as under the following forms of
investments:
1. Through financial collaborations.
2. Through joint ventures and technical collaborations.
3. Through capital markets via Euro issues.
4. Through private placements or preferential allotments.
2) Forbidden Territories:
FDI is not permitted in the following industrial sectors:
1. Arms and ammunition.
2. Atomic Energy.
3. Railway Transport.
4. Coal and lignite.
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds,
copper, zinc.

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3) Foreign Investment through GDRs (Euro Issues):

Foreign Investment through GDRs is treated as Foreign Direct
Investment
Indian companies are allowed to raise equity capital in the international market
through the issue of Global Depository Receipt (GDRs). GDRs are designated in
dollars and are not subject to any ceilings on investment. An applicant company
seeking Government's approval in this regard should have consistent track
record for good performance (financial or otherwise) for a minimum period of 3
years. This condition would be relaxed for infrastructure projects such as power
generation, telecommunication, petroleum exploration and refining, ports, airports
and roads.
4) Clearance from FIPB:
There is no restriction on the number of Euro-issue to be floated by
a company or a group of companies in the financial year. A company engaged in
the manufacture of items covered under Annex-III of the New Industrial Policy
whose direct foreign investment after a proposed Euro issue is likely to exceed
51% or which is implementing a project not contained in Annex-III, would need to
obtain prior FIPB clearance before seeking final approval from Ministry of
Finance.
5) Use of GDRs:
The proceeds of the GDRs can be used for financing capital goods
imports, capital expenditure including domestic purchase/installation of plant,
equipment and building and investment in software development, prepayment or
scheduled repayment of earlier external borrowings, and equity investment in
India.
6) Restrictions:
However, investment in stock markets and real estate will not be
permitted. Companies may retain the proceeds abroad or may remit funds into
________________________________________________________________
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India in anticipation of the use of funds for approved end uses. Any investment
from a foreign firm into India requires the prior approval of GOI.
6.2.2 Approval:
Foreign direct investments in India are approved through two routes:
1) Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a
period of two weeks (provided certain parameters are met) to all proposals
involving:

Foreign equity up to 50% in 3 categories relating to mining activities.

Foreign equity up to 51% in 48 specified industries.

Foreign equity up to 74% in 9 categories.

The lists are comprehensive and cover most industries of interest to

foreign companies. Investments in high-priority industries or for trading

companies primarily engaged in exporting are given almost automatic approval
by the RBI.
2) The FIPB Route:
a) Processing of non-automatic approval cases:
FIPB stands for Foreign Investment Promotion Board which
approves all other cases where the parameters of automatic approval are not
met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors
and all types of proposals, and rejections are few. It is not necessary for foreign
investors to have a local partner, even when the foreign investor wishes to hold
less than the entire equity of the company. The portion of the equity not proposed
to be held by the foreign investor can be offered to the public.
b) Total foreign investment and FDI:
Total foreign investment in FY 1997-98 was estimated at $ 4.8
________________________________________________________________
- 50 -

billion in 1997-98, compared to $ 6 billion in 1996-97. Foreign Direct Investment

(FDI) in

________________________________________________________________
- 51 -

1997-98 was an estimated $ 3.1 billion, up from $ 2.7 billion in1996-97. The
government is likely to double FDI inflows within two years. Foreign portfolio
investment by foreign institutional investors was significantly lower at $ 752
million for fiscal 1997-98, down compared to $ 1.9 billion in1996-97, partly
reflecting

the

effect

of

the

recent

crisis

in

Asia.

6.3 Graphs:
6.3.1

________________________________________________________________
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6.3.2 FDI Inflow in India for the year 2005 -06

________________________________________________________________
- 53 -

6.3.3 Financial Year wise inflows (Equity capital only)

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7. FDI IN RETAIL SECTOR

7.1 Current Scenario:
There has been a heated debate about opening up the retail trade sector
in India to foreign direct investment (FDI). Allowing foreign investment to come in
retail trading is supposed to indicate that economic reforms are on track and that
like in China, Wal-Mart, Carfare, MAKRO, 7 Eleven and many more giant retail
store chains, would be seen in India.
The Indian retail sector is in the midst of a boom. A report by KPMG, India
and the Federation of Indian Chambers of Commerce and Industry (FICCI),
estimated the retail market in India to be around US$ 200 billion, of which
organized retail accounted for US$ 6.4 billion. Organized retail was expected to
increase to US$ 23 billion by 2010. A healthy 7%-8% economic growth,
increasing disposable incomes among the middle class, changing consumer
tastes and preferences, and a young population with a propensity to spend, were
some of the key factors driving growth in the organized retail market in India.
Given the attractiveness of the Indian retail sector, foreign retailers like
Wal-Mart, Carrefour SA, Europes largest retailer, and Tesco Plc, the UKs
largest retailer, were keen to enter this growing market, despite the Indian retail
sector being closed to foreign direct investment (FDI). In February 2006, the
Indian government had announced its decision to allow FDI of up to 51% in
single brand retailing. Wal-Mart had said that India was high on its priority and
that it was closely monitoring the governments policy on FDI in the retail sector.
In July 2006, the Investment Commission suggested that 49% FDI be
allowed in the Indian retail sector without any restrictions on the number of
outlets or location of stores. The Indian retail boom and the Investment
Commissions suggestions renewed the debate on the issue of allowing FDI in
the retail sector.

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7.2 Benefits of FDI in Retail:

FDI could see an improvement in the lifestyle of the middle-income group,

as the entry of international players would lift the wage structure in the
industry.

As a result of FDI flows, one can expect to see stepped-up investments in

technology. The retail giant houses can bring their better managerial
practices and IT-friendly techniques.

Introduction of a wide variety of products to the market.

Eventually, exports will also stand to gain with investments flowing into the
supply chain structure.

The huge employment capacity of the sector will increase the tax-paying
population in the country.

It will enable huge inflow of investment and funds.

It will lead to Growth of Infrastructure.

It will also give a boost to the knowledge base and technical know-how.

It will Reduce Cost and Increase efficiency of producers.

It will also create franchising opportunity for local entrepreneurs.

It will also enable huge investments in supply chain, cold chains and
warehousing.

Implementation of IT in retail will enhance the overall development of the

retail sector and the quality of goods produced and delivered.

It will also stimulate the infant industries and other supporting industries.

7.3 Concerns regarding FDI in Retail:

The opposition to FDI in retail rests on several planks. One, the entry of
large global retailers such as Wal-Mart would kill local shops and millions of jobs.
Two, the global retailers would collude and exercise monopolistic power to raise
prices and monopolistic (big buying) power to reduce the prices received by the
suppliers.
________________________________________________________________
- 56 -

Hence, both the consumers and the suppliers would lose, while the profit
margins of such retail chains would go up. Three, it would lead to lopsided
growth in cities, causing discontent and social tension elsewhere.
While there is an explosion in development of retail malls across the
country, their pricing and quality today are far from international norms. On the
other hand, with little super- premium space being developed to house exclusive
brands, the rentals in this segment is expected to touch an all-time high since the
premium brands will only set up stores in exclusive areas where the space is
already scarce.
Given this backdrop, the recent clamour about opening up the retail sector
to Foreign Direct Investment (FDI) becomes a very sensitive issue, with
arguments to support both sides of the debate. It is widely acknowledged that
FDI can have some positive results on the economy, triggering a series of
reactions that in the long run can lead to greater efficiency and improvement of
living standards, apart from greater integration into the global economy.
Supporters of FDI in retail trade talk of how ultimately the consumer is benefited
by both price reductions and improved selection, brought about by the
technology and know-how of foreign players in the market. This in turn can lead
to greater output and domestic consumption.
But the most important factor against FDI driven modern retailing is that
it is labour displacing to the extent that it can only expand by destroying the
traditional retail sector. Till such time we are in a position to create jobs on a
large scale in manufacturing, it would make eminent sense that any policy that
results in the elimination of jobs in the unorganised retail sector should be kept
on hold.
Though most of the high decibel arguments in favour of FDI in the retail
sector are not without some merit, it is not fully applicable to the retailing sector in
India, or at least, not yet. This is because the primary task of government in India
is still to provide livelihoods and not create so called efficiencies of scale by
creating redundancies. As per present regulations, no FDI is permitted in retail
trade in India. Allowing 49% or 26% FDI (which have been the proposed figures
________________________________________________________________
- 57 -

till date) will have immediate and dire consequences. Entry of foreign
players now will most definitely disrupt the current balance of the economy, will
render millions of small retailers jobless by closing the small slit of opportunity
available to them. Imagine if Wal-Mart, the worlds biggest retailer sets up
operations in India at prime locations in the 35 large cities and towns that house
more than 1 million people; the supermarket will typically sell everything, from
vegetables to the latest electronic gadgets, at extremely low prices that will most
likely undercut those in nearby local stores selling similar goods. Wal- Mart would
be more likely to source its raw materials from abroad, and procure goods like
vegetables and fruits directly from farmers at preordained quantities and
specifications. This means a foreign company will buy big from India and abroad
and be able to sell low severely undercutting the small retailers. Once a
monopoly situation is created this will then turn into buying low and selling high.
Such re-orientation of sourcing of materials will completely disintegrate the
already established supply chain. In time, the neighbouring traditional outlets are
also likely to fold and perish, given the predatory pricing power that a foreign
player is able to exert. As Nick Robbins wrote in the context of the East India
Company, By controlling both ends of the chain, the company could buy cheap
and sell dear. The producers and traders at the lowest level of operations will
never find place in this sector, which would now have demand mostly only for
fluent English-speaking helpers. Having been uprooted from their traditional form
of business, these persons are unlikely to be suitable for other areas of work
either.
It is easy to visualise from the discussion above, how the entry of just one
big retailer is capable of destroying a whole local economy and send it hurtling
down a spiral. One must also not forget how countries like China, Malaysia and
Thailand, who opened their retail sector to FDI in the recent past, have been
forced to enact new laws to check the prolific expansion of the new foreign malls
and hypermarkets.

________________________________________________________________
- 58 -

Given their economies of scale and huge resources, a big domestic

retailer or any new foreign player will be able to provide their merchandise at
cheaper rates than a smaller retailer. But stopping an Indian retailer from growing
bigger is something current public policy cannot do, whereas the State does have
the prerogative in whether foreign entry in the retail sector should be stalled or
not.
It is true that it is in the consumers best interest to obtain his goods and
services at the lowest possible price. But this is a privilege for the individual
consumer and it cannot, in any circumstance, override the responsibility of any
society to provide economic security for its population. Clearly collective wellbeing must take precedence over individual benefits.

________________________________________________________________
- 59 -

8. TECHNOLOGY IN RETAIL
8.1 RFID Tags:
8.1.1 Introduction:

Radio Frequency Identification (RFID) technology has been in use for

decades, initially in military applications, such as tracking material in rugged and
fast-moving situations, where barcodes could not be used. Only within the past
________________________________________________________________
- 60 -

few years has this technology been considered as a complement for barcode
technology in the retail industry.
The RFID tag consists of a tiny chip, approximately of the size of a
pinhead, on which the RFID code resides, and a small antenna. RFID tags can
be manufactured with a variety of chip architectures and code formats. One code
format that enjoys substantial support in the retail industry is the Electronic
Product Code (EPC). The EPC uses a 96-bit scheme advocated by EPCglobal
(previously known as the Auto-ID Center).
Three aspects of RFID that make it a particularly attractive
alternative to barcode are:

It allows information to be read by radio waves from a tag without requiring

line of sight scanning.

It allows virtually simultaneous and instantaneous reading of multiple tags

in the vicinity of the reader.

Each tag can have a unique code that ultimately allows every tagged item
to be individually accounted for.
A typical RFID system uses RFID tags attached to objects, which identify

themselves when detecting a signal from an RFID reader by emitting radio waves
/ signals transmission.
This identification of the object takes place through the EPC,
captured within an RFID tag. The EPC contains an array of product information
that can uniquely identify an individual item, whether that object is a consumer
item, case, pallet, logistic asset or virtually anything else. This provides the ability
to locate or track a product through the supply chain, and to read these EPCs at
a distance and out of the direct line of sight. The EPC tags contain RFID
antennas that communicate the EPC numbers to the EPC readers within the
EPCglobal Network.
For retail, the real power of this technology results from associating unique
identifiers with other information of interest from fields in a database that pertains
to the item. Just a few examples as per retail application are:
________________________________________________________________
- 61 -

Date of manufacture.

Time spent in transit.

Location of distribution centre holding the item.

Name of the last person to handle the item.

Amount for which the item was sold.

Payment method used in buying the item.

Expiration date.

Last date of service.

Warranty period.
While most of these fields will be stored in a computer system that is

detached from the tag, some RFID tag technologies permit additional information
to be written to the tag itself as well as to be removed from it.

________________________________________________________________
- 62 -

8.1.2 RFID in Indian Retail:

With the textile quota phase-out, Indian textile / garment exporters will
emerge with a significant presence on the sourcing plans of major retailers in the
US and the European Union. Wal-Mart, for example, plans to source USD11billion worth of textile merchandise out of India alone, while JC Penney, plans to
jack it up to USD2 billion. Marks & Spencer, Tommy Hilfiger, Carrefour and GAP
are also looking at increased sourcing from India.
Other leading apparel retailers like Benetton, Esquel, Zara, Sears, Target,
etc are already implementing RFID technology for quality assurance, stock
management, returnables management, etc.
Supplying to these companies would thereby mean that Indian exporters
would need to comply with their recent mandates. International buyers and
retailers like Wal-Mart, Tesco, Metro, Albertsons, Marks & Spencer etc. have
already directed their top global suppliers to commence-affixing EPC-enabled
RFID tags on their consignments at the case / pallet levels from 1st January
2005. It is clear that all Indian suppliers would need to fall in line shortly.
RFID deployment in the country has also started. Pantaloon is
piloting an RFID solution at its Tarapur warehouse and factory. Wipro Infotech is
the implementation partner and has been involved in designing the architecture.
The RFID system has been integrated with Pantaloon's existing infrastructure
and the company expects the RFID solution to help it improve collaboration
across the supply chain from the point of sale onwards.
There is also a great interest in India on RFID
adoption amongst defence, FMCG, manufacturing, retail, logistics, and oil & gas
sectors. The government is also likely to be a large potential end user of
EPC/RFID technology for asset management, track & trace of equipments &
spares, etc.

To name a few, EPC-based RFID

technology provides solutions for just-in-time (JIT) manufacturing, mass

customization, zero error production, reduced cycle time, stock management of
raw-materials

finished

goods,

warehouse

management,

sourcing

&

procurement, assembly, order processing, distribution and transportation, et al.

________________________________________________________________
- 63 -

With its varied usage across sectors, RFID can be termed as one of the
most promising and anticipated technologies in recent years poised for nothing
less than complete transformation in the supply chain.
8.1.3 Role of EPC Global India:
EPCglobal India, a division of EAN India, is a regional member
organisation of EPCglobal Inc, the not-for-profit body set up to establish global
standards regarding the development, implementation and adoption of Electronic
Product Code (EPC) and Radio Frequency Identification (RFID) technology, and
support of the EPCglobal Network.
EAN India is a registered society, promoted by the Ministry of Commerce,
Government of India. It is a joint Government-Industry initiative at promoting use
of international identification and communication standards and best practices
within the industry, which can further enhance efficiency of their supply and
demand chains through use of business-led EAN.UCC standards.
8.2 Bar Coding:

Starting from the point of manufacturing to warehousing to distribution and

finally to the point of sales (POS), the organised retail business today is
________________________________________________________________
- 64 -

essentially driven by an efficient Supply Chain which in turn is dependent on the

availability of accurate and reliable data/ information in real time. The Automated
Identification and Data Capture (AIDC) Technologies i.e. Bar-coding/RFID
combined with Mobile Computing and Wireless LAN technologies empowers the
retailing business to meet these critical needs of collection of quality data at all
the points of activity across the complete supply chain.
Bar coding is a proven technology for automated data collection needs of
the business. In layman terms, a barcode actually contains any given alpha
numeric information encoded in the form of Bars and Spaces using international
symbologies which are like language of the barcode. On retail products, the
barcode normally contains the product ID (e.g. item code, product code etc.)
which is required to be entered into the computer system to update the data at
the time of billing, receiving or dispatch. With the barcode in place, the data is fed
into the system automatically by scanning the barcode using a bar code scanner
instead of punching the same through a keyboard. It is beneficial in the following
ways:
1) Starting at Point of Sales:
The fast checkout and reduced queues attracts more customers and
ensures that customer visit the store again and again. The Bar Code scanners at
point of sales help in the elimination of queues with fast checkout by automating
the data entry into system. The benefit is that the data fed is nearly 100 per cent
accurate and the whole Item code is scanned in a fraction of second. The
scanners come in lots of varieties to meet varied needs of retailers.
2) In the Store:
Barcodes solutions play an important role in utilising customised in-store
marketing, increasing up-selling and cross-selling opportunities, quickly locating
merchandise, easily monitoring inventory and checking prices. The state-of-the
art solutions based on barcode technology enables retailers to improve the
customer's experience at the primary point of decision the selling floor.
________________________________________________________________
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3) Distribution Center:
The combination of barcode and Mobile Computing technologies allows
the streamlining of distribution centre activities. The work force at a distribution
centre is empowered with high performance, rugged and easy-to-use mobile
computers. The mobile computer is a true replacement for a desktop PC from the
perspective of the person who is involved in numerous receipts and dispatches in
a large distribution centre and saves him from tedious data entry and errors thus
eliminating the risk of wrong stock information and wrong dispatches.
4) Manufacturer to Distribution Centre:
The barcode technology helps the retail products manufacturer ( mainly
FMCG companies) to automate their process from manufacturing to distribution
centre (DC). At the manufacturing floor, the fixed mount scanner integrated with
conveyor system helps in sorting the manufactured items based on their packing
and other parameters. The fixed mount scanner is basically a high performance
scanner.
8.3 Awareness in Indian Retail:
With the size of organised retailing growing, the bar-coding
technology has become completely indispensable, especially at the POS
applications due to its inherent benefits and cost effectiveness. Bar-coding
coupled with Mobile computing and WLAN technologies is also gaining ground at
the back door applications like inventory and warehousing operations. Major
international players in the bar-coding technology like Symbol, Zebra, Intermec
have targeted India as a very focused market. These companies have been
offering special pricing for the Indian market to promote the technology and to
make the products affordable for even medium scale operations and thus
opening up the large volumes. Reduction in import duties has further helped in
________________________________________________________________
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increasing the popularity of these technologies. This technology will be further

boosted if the Government decides to open Retail for FDI, since MNCs are
already using these technologies abroad very extensively across the complete
supply chain.

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9. CURRENT SCENARIO OF INDIAN RETAIL SECTOR

9.1 Features of the Current Scenario:
(Source: IMAGES - KSA Technopak INDIA RETAIL REPORT 2005)

4th Largest economy in PPP terms after USA, China & Japan.

To be the 3rd largest economy in terms of GDP in next 5 years.

2nd fastest growing economy in the world.

The US $ 580 billion economy grew 8.2 percent in the year 04-05.

Among top 10 FDI destinations.

Stable Government with 2nd stage reforms in place.

Growing Corporate Ethics (Labour laws, Child Labour regulations,

environmental protection lobby, intellectual and property rights, social
responsibility).

Major tax reforms including implementation of VAT.

US $ 130 billion investment plans in infrastructure in next 5 years.

Share of Organized Retail:

Total Retail (in billion INR)
Organized Retail (in billion INR)
% Share of Organized Retail

1999
7000
50
0.70%

2002
8250
150
1.80%

2005
10000
350
3.5%

9.2 Upcoming areas:

Stocks in the retail sector are becoming increasingly attractive from an

investor's point of view. Successful development of value based concepts
as well as development of retail space in smaller cities and towns shall
drive the organized retail into the next levels of cities. Retailers have

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responded to this phenomenon by introducing contemporary retail formats

such as hypermarkets and supermarkets in the new pockets of growth.

In addition, petro - retailing efforts of petroleum giants scattered through

out the country's landscape have also ensured that smaller towns are also
exposed to modern retailing formats.

Mall development activity in the small towns is also picking up at a rapid

pace, thereby, creating quality space for retailers to fulfill their aggressive
expansion plans. Thus, the retail boom', 85% of which has so far been
concentrated in the metros is beginning to percolate down to smaller cities
and towns. The contribution of these tier-II cities to total organized retailing
sales is expected to grow to 20-25%.

Favorable demographic and psychographic changes relating to India's

consumer class, international exposure, availability of increasing quality
retail space, wider availability of products and brand communication are
some of the factors that are driving the retail in India.

Manufacturers in industries such as FMCG, consumer durables, paints etc

are waking up to the growing clout of the retailers as a shift in bargaining
power from the former to the latter becomes more discernible. Instead of
viewing retailers with suspicion, or as a necessary evil' as was the case
earlier, manufacturers are beginning to acknowledge them as channel
members to be partnered with for providing solutions to the end-consumer
more effectively.

Though lucrative opportunities exist across product categories, food and

grocery, presents the most significant potential in the Indian context as
consumer spending is highest on food.

Wholesale trading is another area, which has potential for rapid growth.
German giant Metro AG and South African Shoprite Holdings have
already made headway in this segment by setting up stores selling
merchandise on a wholesale basis in Bangalore and Mumbai respectively.

These new-format cash-and-carry stores attract large volumes from a

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sizeable number of retailers who do not have to maintain relationships

with multiple suppliers for all their needs.

Rural retailing - of late, India's largely rural population has also caught the
eye of retailers looking for new areas of growth. ITC launched the
country's first rural mall Chaupal Sagar' , offering a diverse product range
from FMCG to electronics appliance to automobiles, attempting to provide
farmers a one-stop destination for all of their needs. Other corporate
bodies include Escorts, and Tata Chemicals (with Tata Kisan Sansar) are
setting up agri-stores to provide products/services targeted at the farmer
in order to tap the vast rural market.

9.3 Indian Retail by 2006 -07:

50 million sq ft of quality space under development.

7 major cities to account for 41 million sq ft development.

300 malls, shopping centres and multiplexes under construction.

To

open 35

hypermarkets, 325 large department stores, 1500

supermarkets and over 10,000 new outlets .

US $ 10 billion of business to organized retail.

Scalable and Profitable Retail Models are well established for most of the
categories.

Rapid Evolution of New-age Young Indian Consumers.

Retail Space is no more a constraint for growth.

Partnering among Brands, retailers, franchisees, investors and malls.

India is on the radar of Global Retailers Suppliers.

9.4 Case study on Reliance Retail:

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A targeted sales turnover of Rs 90,000 crore (US$ 20 billion) by 2010 with

a planned investment of Rs 30,000 crore over the next five years that's the
retail vision of Mukesh Ambani and his RIL retail team. RIL's retail venture seems

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all set to achieve the status of being the flag-bearer of India Retail Inc, and
that too in record time.
The Reliance Retail envisages nation-wide chains of hypermarkets,
supermarkets, discount stores, department stores, convenience stores and
specialty stores, in about 800-odd cities and towns across the length and breadth
of India. The RIL board of directors approved the initial phase of the retail foray at
an estimated cost of Rs 3,350 crore (US$ 750 million).
The entire Indian retail sector is estimated to be at Rs 1050,000
crore (US$ 233 billion) growing at five per cent annually and the estimated
share of organised retail is only Rs 36,000 crore (US$ 8 billion), at present, albeit
growing at over 30 per cent every year.
That

makes

Reliance

Retail's

proposed

investments

equivalent to about 10 per cent of India's organised retail market such a level of
investment in the Indian retail arena has been unprecedented in the country's
most promising sunrise industry retail.
Strongly believing in the 'farm-to-fork' model, RIL top
brass made a few trips to various states last year to work out an exclusive
contract-farming project with the farmers whereby Reliance Retail will purchase
fresh vegetable and farm produce from these states and transport the same to its
warehouses, which will subsequently transport the same to the inter-connected
Reliance

retail

centres.

To strike an example, pineapples that are sold at a mere 25 paise a piece in the
North-East will be purchased in bulk by Reliance Retail, and shipped to the entire
network of Retail stores all over the country. What this also ensures is that
farmers and growers get a fair price for their produce and the huge cost benefits
of wholesale procurement gets passed on to the end-consumer.
As part of its backward integration, the company has plans to set
up an integrated supply chain infrastructure, including a cold chain for foods. It is
believed that RIL will feed the huge retail chain through seven large wholesale
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terminals. Its plans include over 150 warehouse clubs or distribution centres,
catering to the supply and requirements of its speciality stores, hypermarkets,

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supermarkets, department and discount stores. Various media reports suggest

that the company is actively scouting for real estate across India and may even
hire large malls for its purpose.
In the consumer durables sector, Reliance Retail is reported to have
entered into agreements and contracts with the leading manufacturers to procure
merchandise directly from their factories. RIL's huge warehousing facilities are to
be dotted all over the country and expected to be the hub, the nerve-centre for
the supply base that will feed the network of stores. Bangalore, for instance, is
likely to be the base for Reliance Retail's apparel operations.
The magnitude and strategy of RIL's retail foray is sure to have far
reaching social and economic implications by directly influencing the lifestyles of
hundreds of millions of consumers, besides indirectly impacting the livelihood of
tens of millions. This indirect impact will be on those engaged in a wide range of
economic activities including farming, consumer goods manufacturing, and a
host of myriad other services that bring hundreds of categories of goods and
services from the producers to the final consumers.

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9.5 Changing Consumer Behaviour:

The retail sector is booming and it is equally important to know, how the
consumer awareness and behaviour towards the change in retail sector, is also
changing. Following are some statistics which show changing consumer
behaviour and habits with respect to Food retail:

9.5.1 Changing Habits/ Preferences:

Changing consumer preferences in

buying groceries

Local
Grocer
43%

Superm
arket
57%

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9.5.2 Increasing Quality Consciousness:

Quality
compromiser
27%

Not at all
quality
conscious
1%

Quality
conscious
72%

9.5.3 Changing spending habits:

Supermarkets

Local Grocer

Others

3%
32%

65%

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9.5.4 Consumers preference in buying with respect to time consumed:

Time spend on buying groceries

Longer time
19%

Less time
81%

9.5.5

From the above diagrams we can see that the consumer

preferences are changing. Most of them prefer buying from the supermarkets for
the following reasons:
Quality
Time saver
Location
5%

Reasonable

7%
2%

26%

Hygiene

5%

Home delivery

2%
2%

Personal attention
Variety

14%

Ambience
20%
13%

4%

Discounts &
schemes
Others

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9.5.6 Many consumers prefer the local grocer for the following reasons:

5% 5%

17%

3%
11%

8%

8%

14%

6%

6%
14%

3%

Quality
Time saving
Location
Price
Hygiene
Negotiatiable
Credit facility
Home delivery
Personal touch
Daily basis
Exchange facility
Others

Conclusion:
All these various pie charts reveal how the consumer habits are changing. This in
turn will affect the Indian Retail sector in a positive way since it is booming with
supermarkets and malls i.e. developing into an organised format.

[P.S.: These charts are based on a survey (refer annexure) which was conducted
on women between the age group 30 50 yrs. The sample size was 50 and the
method used was random sampling.]

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9.6 Articles on recent developments in Indian Retail Sector:

Following are some articles sourced from The Economic Times [ET] which
highlight how the Indian retail sector is booming with opportunities for the
retailers as well as the consumers. A gist of each article is given below:
1) RELIANCE, PANTALOON JOSTLE FOR SPACE [ET, 7th June, 06]:
This article talks about the soaring estate prices that will affect the retail
giants like Reliance, Pantaloons, etc. and the strategies they are using to cope
with it. Pantaloons is in talks with Unitech for tieup. Reliance is exploring options
with DLF and other real estate firms. These tieup strategies will help to leverage
developers land banks and avoid huge investments.
2) SOURCE CODE: GLOBAL RETAIL BRANDS HAVE DESIGNS ON INDIA
[ET, 14th June, 06]:
International retail brands like Wal-Mart, GAP, J C Penney and Target
have doubled their sourcing operations from India. Since quotas were dismantled
early last year, new entrants like Steve & Barrys are cashing in on the cost
advantage and setting up their entire operations in India. A number of these retail
chains are already eyeing the Indian market and once they are allowed it would
further increase their sourcing from India.
3) RELIANCE TO SCRIPT A Rs.25k-cr RETAIL TALE [ET, 28th June, 06]:
This article summarises the future plans of Reliance. Reliance will spend
Rs.25,000cr over the next few years to create a giant retail network of shops to
cash in on the consumption boom in the big cities and the rural hinterland which
is famous for wealthy and rich farmers and traders. It will be setting up a chain of
supermarkets, hypermarkets, discount stores & luxury stores across 1500 cities

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and towns. It will also:

- Hire 10,000 professionals.
- Invest Rs.10,000cr in Reliance retail, total investments to touch
Rs.25,000cr eventually.
- Employ 5,00,000 people for Customer Service.
- Set up training institutes in 1500 cities.

(Other related articles: a) Now Rolling: The Giant Retail Wheel

b) Reliance builds a mega talent pipeline.)
4) WAL-MARTS INDIA DREAM HITS FDI WALL [ET, 5th July, 06]:
Government is now relying on domestic entrepreneurs such as Reliance,
Bharti and Pantaloon in modernising Indian Retail sector instead of seeking
foreign investments by foreign retail majors like Wal-Mart, etc. By discouraging
FDI in retail, government is encouraging domestic retail and making it globally
competitive.
5) RETAILERS MAKE THEIR POP WITH GIZMOS [ET, 19th July, 06]:
This article talks about Genext of Indian retailing where posters and
traditional in store display material is about to given way to gamut of new age
POP tools. Ranging from laser lights to smoke screens, to rotating LCD screens
to even floor graphics. These POP tools will influence th buyer behaviour
immensely and enhance POP.
6) LATE NGHT SHOPPING TO BE A REALITY SOON [ET, 26th July, 06]:
It talks about the future plans of retailers in providing service till late nights.
Metros like Mumbai, Hyderabad, Bangalore, Chennai, may soon allow shopping
malls and retail chains to operate outlets till wee hrs. This late night shopping
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saga is in talks by lobbyists. Retailers Association of India is also trying to

influence and supporting this 24 X 7 shopping service.

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7) PANTALOON RETAIL TO TEAM UP WITH VIDEOCON [ET, 2nd August, 06]:

Pantaloon Retail is joining hands with Videocon for consumer durables to
meet up the competition with Reliance Retail. Pantaloon retail will be sourcing
the complete range of consumer durables from Indian manufacturers and retail at
discount prices under existing brand names Koryo and Sensei.
8) IOC NOW LINES UP ALL IN - A MALL OFFER [ET, 2nd August, 06]:
Petro Retail leader is now planning to leverage its massive land bank with
retail players to begin its non fuel retail business. In a two pronged strategy, the
company plans to offer the unused land within the fuel stations across the
country as equity to retail players to set up malls. It is also trying to work out
deals to set up fuel stations inside mall complexes. It is in talks with Rahejas,
Pantaloon, Ansals and DLF to form tie-ups.
9) RELIANCE RETAIL SEEKS REALTY BITE [ET, 16th August, 06]:
This article talks about Reliance Retails strategy on acquiring land for its
Rs.25,000cr project. It is eyeing at acquiring 15mn sq. ft. of retail space. It is also
planning to acquire space for rural retail centres and malls. Its retail model is
based on Own the space strategy instead of the usual Lease space structure.
For the same it is consulting global property consultants like Knight Frank,
Cushman & Wakefield, Trammel Crow Meghraj, etc.

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10. RECOMMENDATIONS FOR INDIAN RETAIL

SECTOR

10.1 Policy Recommendations:

1) Permit FDI in retail:
FDI has played a key role in the rapid development of high quality retail in
several other developing countries. Allowing global retailers to invest in this sector
would attract best practice players into India. Several retailers (such as Tesco, Marks
& Spencer and Toys 'R' Us) have already evinced an interest in building businesses
here.
The counter stores are likely to be most threatened by the introduction of FDI.
The small trader lobby has been vocal on the issue of not permitting FDI into retail,
and has successfully ensured that policy on this front is unchanged. The lobby is
based on the premise that modern retail will impact the livelihood of millions of small
family-run retail businesses.
However, as we have seen, if broad-based reforms are executed
we are likely to see both employment in retail and retail spending increase.
2) Remove bottlenecks in the supply chain:
To adequately develop the upstream, policy makers need to do away with the
constraints on processing, manufacturing and distribution.

Relax SSI reservation:

The reservation of large sub-segments for the small scale
renders the processing sector, particularly in food and apparel, inefficient.
Therefore, the first step should be to continue to relax restrictions and
permit larger, more efficient players to enter these sectors. While the
incumbent small-scale firms might oppose such a move, it should be
emphasised that this will allow small-scale firms to increase scale and
become far more productive and competitive.

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Remove distribution constraints:

Allow retailers to buy directly from farmers and remove restrictions on
food grain movement across states. Encouraging additional investment in
distribution infrastructure (such as cold chains and silos) will help remove
constraints.

3) Organise the market for real estate:

Here the objective is to ensure a regular supply of real estate for retail
and to ensure transparency in dealings. To ensure buoyant supply, policy makers
need to act on- four fronts:

Ensure proper rent laws:

Linking rents to market value will ease out businesses surviving
on uneconomic rental rates (e.g., shops in Connaught Place in Delhi). Strict
enforcement of rental laws will make landowners more confident of getting
their property back. This in turn will lead to a rationalisation of retail land
prices. The challenge here will be executing this change as we have seen
in the past few years when the government has tried to introduce the
concept.

Make zoning laws more flexible:

The government needs to be more flexible with zoning laws and ensure
that usage norms take into account both demand and supply without
upsetting the balance, both in urban and suburban areas.

Restructure finances of municipal bodies:

The responsibility for providing adequate local infrastructure rests with
local governments. To improve their finances, these governments first need
to enforce property tax collection to raise funds for infrastructure
development. Second, as we saw in the power case study (Chapter 9,
Volume III: Power), the issue of subsidised user charges needs to be
addressed to attract fresh investment.

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Increase land supply:

City administrations need to bring government-owned land into the
market more regularly. This will encourage and aid large-scale
developments both in the suburbs and within cities.

4) Simplify the tax structure:

The government should ensure adoption of a uniform sales tax rate across
states, and with time, introduce Value-Added Taxation (VAT). It should also eliminate
octroi wherever it is levied. These policy changes are already being considered, and all
the states have already accepted the move to a uniform sales tax structure in principle.
5) Ensure greater flexibility of labour laws:
Permitting flexibility in the use of labour without doing away with the benefits
accruing to them will permit retailers to better organise operations and improve
capacity utilisation. This will include permitting retail businesses to stay open all days
of the week, encouraging use of part-time labour, etc. Some southern states have
already begun this at the request of modern retailers.
6) Better enforce tax collection from small retailers:
As we have discussed earlier, small retailers in India derive several
benefits from non-enforcement of labour and taxation laws. While it will be difficult for
the enforcement mechanism to regularly monitor labour use and electricity
consumption by the millions of small counter stores, it will definitely need to improve
tax collection from them.
7) Ensure single-window clearance for retail chains:
State governments should make all licences and permits for retail available
through a single agency, at least at the city level. Providing one-time licences for
multiple stores in a chain will ease the bureaucratic hurdle experienced by modern
retailers.

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The state/local government bureaucracy is a critical stakeholder in retail.

Several important changes needed in the retail environment imply a loss of power for
government officials. These comprise better enforcement of laws among small counter

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stores, simplification of legislation and loss of tax revenue from sales and octroi levies.
While the legislative change might be easier to initiate, a behavioural change will take
longer.
10.2 Other measures:
After leading the IT bandwagon, India is poised to grow as a Retail
hub. It is imperative to sustain the modernization of the retail sector and cater to
the growing taste of the Indian consumer and dispel the myth that the game is
big Vs small or traditional Vs modern or organized Vs unorganized or local Vs
foreign. What is needed is to promote consumption which will ultimately lead to
economic growth of the country. For the Indian consumer, the gradual and stepwise entry of foreign companies in retail involves three pivotal changes modern
technology, better transparency in dealings and sharing best practices. Today,
the question is not of whether India should open to FDI but on when to open
and how to open. FDI in Retail can be leveraged for incremental results in the
sector with an India-specific approach keeping the following points in
consideration:

Upgrade existing Infrastructure and stimulate further development.

Key initiatives that the Government and the Industry need to take
together.

Ensure that the opening of this sector to foreign players is a win-win for all.

To ensure that Indian retail dynamics are very different from other
countries.

To ensure that though we learn from global experiences, we do not go all out to
copy global models.

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11. CONCLUSION
Therefore, from all the information it is evident how the Indian Retail sector
is booming with opportunities. This will not only result in huge profits by the
retailers but also benefit the consumers by providing best quality goods at
reasonable prices.
This will enhance the standard of living of Indian consumers and ultimately
lead to overall economic development.
The governments initiative to encourage the Indian retailers instead of
Foreign retailers will result in ample amount of employment opportunities and
indirectly providing support to many jobless people throughout the country i.e. in
urban as well as rural areas.
To conclude, this boom in the Indian retail sector will lead to an overall
economic and social development of the country and making it a globally
competitive nation.
So, as they say, let the action begin!!!

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