A Seminar Report I

(Subject Code.)

Submitted in the partial fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION (MBA) From

Chhattisgarh Swami Vivekanand Technical University Bhilai (C.G.) Session 2010-12

Submitted by Nehru Lal Sahu Roll No: 5013610092 Enrollment No: AG8388 MBA - III Sem. Section- A

DEPARTMENT OF MANAGEMENT

BHILAI INSTITUTE OF TECHNOLOGY

(An ISO 9001:2000 Certified Institute)

Bhilai House, Durg 491001 (C.G.), India

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Index
Introduction about Retail.. Need of FDI in retail. FDI in single-brand retail.. FDI in multi-brand retail... Oppose FDI in retail sector Experience of FDI in retail trade in china

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Introduction
Definition of Retail
In 2004, The High Court of Delhi defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

Division of Retail Industry Organized and Unorganized Retailing

The retail industry is mainly divided into:1) Organised Retailing 2) Unorganised Retailing

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, mom-and-pop shop etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of Indias GDP.

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Need of FDI in retail

With the government's conditional nod to FDI (foreign direct investment) in multi-brand retail seemingly around the corner, the question arises: does organised retail really require FDI? The unequivocal answer: Yes'.

Although Indian retailers have made steady progress in the past decade, their efforts fall short in matching global norms in a sector estimated to be worth more than $450 billion. Consequently, organised retail has barely more than 4 per cent market share in India. Indian retailers simply lack the deep pockets and in-depth domain expertise required to be on a par with global models. The presence of foreign retailers through joint ventures and other means could certainly speed up the process of transforming India's retail trade.

Multiple intermediaries
There's a broad consensus on the need to enhance efficiencies in the domestic trade of consumer goods. Efficient management practices and economies of scale, coupled with the adoption of global best practices and modern technology, could vastly improve systemic efficiency. Presently, retail trade is disorganised and largely inefficient. As in other economic activities, minimising costs and maximising efficiency are imperative in retail trade. Like their foreign counterparts, Indian consumers too are entitled to receive quality products, produced, processed and handled under hygienic conditions via professionally-managed outlets. Unfounded apprehensions that small retailers will be adversely affected are not reason enough to deny millions of consumers access to world-class products.

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Moreover, today's intermediaries between producers and consumers add no value to the products, but add immensely to final costs. By the time the products travel from the farm-gate to the marketplace via various intermediaries reduces, they lose freshness and quality resulting in huge wastage. Nevertheless, intermediaries reap huge profits by spreading wastage losses between producers and consumers. This is achieved by buying products at low prices from producers, but selling at highly marked-up prices to consumers. In an unsound system with multiple intermediaries simply for logistics, only intermediaries benefit.

With organised retail, every intermediate stage procurement, processing, transport and delivery adds value to the product. This happens because it uses global best practices and modern technology, ensuring optimum efficiency and minimum wastage. Organised retail enables on-site processing of produce, scientific handling and quick transport through cold storage chains to the final consumer. Once modern retailers introduce an organised model, other vendors, including small retailers, would automatically copy this model to improve efficiencies, boost margins and stay in business. Organised retail would thereby bring more stability to prices, unlike the present system where hoarding and artificial shortages by profiteering intermediaries push up product prices.

Convenience of kiranas
Concerns about kiranas closing down after the advent of organised retail are not based upon facts. Given the huge population and large number of cities and towns , it's erroneous to conclude that organised retailers would drive small stores out of business. Small stores offer customers the convenience of quick doorstep delivery, even extending a month's credit. No organised retailer can match such convenience.

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This is one reason why FDI in retail in other nations, including China, did not lead to closure of Mom-and-Pop stores. China's experience indicates that both organised retail as well as Mom-andPop stores can co-exist. China first allowed FDI in retail in 1992, capping it at 26 per cent, while India capped FDI in single-brand retail at 26 per cent. Only in 2004 did China permit 100 per cent FDI. Since then, Chinese Mom-and-Pop stores have grown from 1.9 million to more than 2.5 million. Conversely, organised retail has just 20 per cent penetration , despite operating there for almost 20 years.

More jobs
Some stakeholders speculate that millions of jobs would be lost due to FDI in retail. Actually, it will be the other way around. With the entry of modern retailers, the market will expand, creating millions of additional jobs in retail and other tertiary sectors. Given their professional approach, organised retailers will allocate some amount of resources towards the training of people they hire.

This has already happened with the Bharti-Walmart joint venture, which has joined hands with some State Governments in opening training centres in Amritsar, Delhi and Bangalore to train local youth for jobs in retail. Training is totally free and more than 5,600 local youth have already been trained . Retail jobs don't require higher education or highly specialised skills.

Finally, considering the conditions incumbent for the opening of multi-brand retail, it should be clear that this will be a win-win situation for all parties. One of the crucial norms in the formal proposal for permitting FDI is that 50 per cent investment will be mandatory in back-end infrastructure, which includes cold storage chains and warehousing.

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The minimum FDI investment would have to be $100 million. Retail stores would only be allowed in cities with more than one million people. Front-end operations would be allowed only in States that agree to permit FDI in multi-brand retail. It will also be mandatory for retailers to source minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises.

Such stipulations will serve as sufficient safeguards for small retailers. Ultimately, farmers and small producers will benefit from better prices for their products and produce, while consumers will receive quality products at lower prices along with better service.

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FDI in single-brand retail

The government is considering allowing foreign companies to completely own single-brand retail stores in the country, after it was forced to put its plans of letting foreign retailers invest in multibrand outlets on the backburner due to lack of political consensus.

At present, only 51% foreign direct investment, or FDI, is allowed in singlebrand retail and the industry ministry is now looking at a proposal to raise this limit to 100% as it seeks to send a positive signal to foreign investors. "We have discussed the proposal internally and it was even put up before a joint government-industry task force," a government official told ET.

The move to raise the FDI limit in singlebrand retail is being accompanied by a tightening of norms for the sector. In its update of the FDI policy issued on September 30, the government has mandated that the foreign investor must own the brand that it intends to retail in India. This is to ensure that franchisees of brands do not take advantage of a more liberal investment regime.

Ironically, while the government now seeks to appease global investors by possibly hiking the FDI ceiling, the decision to allow foreign investment in single-brand retail a few years ago was meant to be the first step towards the eventual opening up of the entire retail sector to foreign competition.

Global Retailers Impatient

Global retail chains such as Walmart, Tesco and Carrefour have been impatiently waiting for several years to open stores in India and earlier this year a committee of secretaries had endorsed a proposal to allow 51% FDI in multi-brand retail. But the proposal has not gone to the Union Cabinet because of differences within and possibility of political opposition.

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Last week, on his way back from the US, Prime Minister Manmohan Singh said FDI in multibrand retail would be allowed only after a consensus is reached. But while big foreign retailers will have to wait for some more time, single brand owners are excited at the possibility of higher foreign investment limit, as it would allow them to bring more funds into India to expand their business. "We are looking at opening at least 20 new boutiques across India in the next three years and such a policy will make it possible," says Manishi Sanwal, general manager, LVMH Watch and Jewellery. "Despite having resources we were unable to expand as much as we would have liked," he added.

"We will definitely invest more aggressively and push up our expansion plan," says Deepak Aggarwal, managing director, Kazo Fashions, one of the leading women's fashion brands. Full ownership of their ventures may also encourage some of the brands to go on their own instead of entering into joint ventures or licensing agreements with Indian retailers. Reliance Retail, part of the Reliance Industries group, has a joint venture with Marks and Spencers while Trent, the retail arm of the Tata group, has tied up with Spanish fashion retailer Inditex Group that owns the Zara brand.

FDI in single-brand retail may be increased to 74%

Commerce & industry minister Anand Sharma is expected to pilot a proposal for increasing the foreign direct investment ceiling for single-brand retail trading to 74% from 51% while he awaits a political green light to allow international retailers such as Wal-Mart and Carrefour to open multi-brand outlets through majority-owned joint ventures.

Sharma is pushing his officials to speed up the plan for higher FDI ceiling in single-brand retail as he wants to end the perception of policy paralysis, boost employment and provide a fillip to

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local sourcing. If approved by the Union Cabinet, the move will benefit the likes of Mothercare, Marks & Spencer and Zara that are operating with local partners.

In recent weeks, the government has publicly expressed its intent to increase the cap but has not specified the extent of hike. On multi-brand retail, something that has been in the pipeline for over seven years, all that the government is willing to say is that consultations are underway. But sources said a consensus even within the Congress party was missing. With crucial assembly elections in Uttar Pradesh due next summer, the government may not be keen about pushing ahead with allowing international chains to set up stores. UP chief minister Mayawati had banned the operation of large retailers in the state and the BJP eyes kirana store owners as its constituency.

Last week, in an interview, Sharma had told TOI that he would discuss the issue of allowing 51% FDI in multi-brand retail with Prime Minister Manmohan Singh and Congress president Sonia Gandhi. Although he met Sonia last week, it could not be ascertained if discussions on FDI took place.

In the absence of political clearance, the commerce & industry ministry is unable to move a Cabinet note despite a committee of secretaries working out the contours of the plan a few months ago. The secretarial panel had suggested that safeguards be built to ensure that the market is not flooded by cheap imports, especially from China, and impact local producers. Although several ministries pitched for a mandated level of local sourcing, commerce & industry ministry was wary of incorporating clauses to this effect, fearing action at the World Trade Organization.

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FDI in multi-brand retail

The government today indicated an "early" decision on opening multi-brand retail to foreign investment, stating that the issue is receiving attention "at the highest level".

"We will take the early and correct view...When I say early view, it means early view," Commerce and Industry Minister Anand Sharma said, when asked whether the much-delayed decision could be expected this year. At present, India allows 51% FDI in single-brand retail and 100% in cash and carry format of the business.

Several global chains like Wal-Mart, Metro and Carrefour have opened their cash and carry stores and are waiting in the wings for opening of the policy for front-end retail.

A group of secretaries headed by Cabinet Secretary Ajit Kumar Seth had in July recommended 51% FDI in the politically sensitive sector. The committee also recommended that at least 50% of the investment and jobs should go to rural areas and the minimum investments should be USD 100 million.

In July 2010, the Department of Industrial Policy and Promotion (DIPP) floated a discussion paper on opening of the multi-brand retail. Global retail giants are eying India's retail sector, dominated by mom and pop stores. Only 4% of India's retail is in the organised sector.

India, which is the second largest producer of food grains and vegetables and fruits, suffers huge post-harvest losses of up to 35-40% due to lack of adequate infrastructure, like cold storage facilities and processing.

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Oppose FDI in retail sector

The Tamil Nadu Chamber of Commerce and Industry has voiced its strong opposition to any move by the Central Government to permit foreign direct investment (FDI) in multi-brand retail sector in the country.

In a statement issued here, chamber president S. Rethinavelu said that the Union Commerce Ministry has reportedly sent a cabinet note to permit 51 per cent FDI in multi-brand retail sector.

This move, he alleged, was being done at the behest of intense lobbying by multinational retail companies eyeing the Indian market, which is estimated to be worth Rs. 20 lakh crore by 2015, according to some studies. Such a move would adversely affect the livelihood of four crore small and medium retailers and their 20 crore dependents.

The trade body also noted a recent statement issued by Union Commerce Minister Anand Sharma suggesting the enhancement of FDI limit in single brand retail sector to 74 per cent from the present 51 per cent.

While this move would not cause much harm, the Central Government must incorporate adequate riders into these proposals to protect well-developed products turned out by indigenous small and medium enterprises, he said.

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However, Mr. Rethinavelu vehemently opposed any move to open FDI into multi-brand retail sector as it could affect a large number of the populace.

He also recalled that the Chairman of the Economic Advisory Council to the Prime Minister, C. Rangarajan, had turned down the view of an Inter-Ministerial Group on opening up the multibrand retail sector as he had expressed doubts whether MNCs would establish contact points' with farmers.

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Experience of FDI in retail trade in china

FDI in retailing was permitted in China for the first time in 1992. Foreign retailers were initially permitted to trade only in six Provinces and Special Economic Zones. Foreign ownership was initially restricted to 49%. Foreign ownership restrictions have progressively been lifted and, and following Chinas accession to WTO, effective December, 2004, there are no equity restrictions. Wholesale and retail projects forms part of the Catalogue for Encouraged Foreign Investment Industries (Annexure 1).

Retail trade in China has been growing since 1992.

Employment in the retail and wholesale trade increased from about 4% of the total labour force in 1992 to about 7% in 2001. The number of traditional retailers also increased by around 30% between 1996 and 2001.

In 2006, the total retail sale in China amounted to USD 785 billion, of which the share of organized retail amounted to 20%.

Some of the changes which have occurred in China, following the liberalization of its retail sector, include : Over 600 hypermarkets were opened between 1996 and 2001 The number of small outlets (equivalent to kiranas) increased from 1.9 million to over 2.5 million Employment in the retail and wholesale sectors increased from 28 million people to 54 million people from 1992 to 2001

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China is witnessing robust economic growth and increasing urban and rural incomes are fueling consumption level in this vast and complex retail environment. According to Euromonitor, retail sales in China, which amounted to nearly USD 554 billion in 2003, were expected to grow rapidly to reach USD 900 billion by 2009

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Bibliography:
http://www.thehindubusinessline.com/opinion/article2389422.ece http://www.moneycontrol.com/news/business/fdiretail-to-comeriders-attached-saysbiyani_568524.html http://business-standard.com/india/news/fdi-in-multi-brand-retailthe-back-burner-again/449066/ http://www.thehindu.com/business/Economy/article2482410.ece

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